You have just started working. Your employer offers you a choice between a defined-benefit (DB) pension plan and a definedcontribution

(DC) pension plan. Under the terms of the DB plan, your annual pension payment will be equal to 2% of the average of your salary during your final three years, multiplied by the number of years of service. The pension payment will be made once a year (at the end of each year), starting from the year you begin your retirement until you pass away. Under the terms of the DC plan, you and your employer will each contribute $6,000 per year (and hence the total annual contribution is $12,000). The contribution will be invested in a risk-free instrument that earns 5% p.a., annual compounding.

(Note that the contribution amounts remain the same year after year.)

Your current salary is $50,000, and it increases at the rate of 2% per year. You plan to retire in thirty years, which means that your finalyear salary will be $50,000 × (1.02)³⁰. Assume that you will live for thirty years after you retire and that the rate of return will be 5% p.a., annual compounding throughout your life. Disregard income tax in your calculations. What will be your annual pension benefit under each pension plan?