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What are the advantages and disadvantages of a Defined Benefit Pension Plan?

A defined benefit plan is when an employer agrees to provide a specific level of retirement income that may vary (increase) with years of seniority (Yap et al., 2021, pg 140).

Advantages:

• The future of the benefit plan and amount that will be available for retirement is known.
• Employees who have been with the company their entire careers receive maximum benefits.
• Realistic cost predictions for employers.

Disadvantages:

• Pension may be calculated using average career earnings rather than recent years earnings which may reduce the pension amount.
• Employee pension is at risk if the company goes bankrupt and the pension hasnt been fully funded yet.

What are the advantages and disadvantages of a Defined Contribution Pension Plan?

A pension plan made up of contributions from the employee and the employer. Employees have the option to contribute a certain percentage of their pay to their pension fund and employers make a matching contribution up to a certain amount.

Advantages:

• More advantageous for short-term employees.
• No risks of surpluses or deficits.
• Employers know their costs from the beginning.

Disadvantages:

• Final amount is unknown and dependent on investment success.
• Employer is committed to a certain pension amount and holds the liability of paying it out

Considering that Wilson Brothers has employees with significant age and service and yet would like to attract young high-calibre talent to the organization what type of pension plan would you recommend?

For the newer and younger talent at Wilson Bros. I recommend offering a defined contribution plan. This plan is more advantageous for short-term employees as it allows them to have control over their pension funding and is not dependent on seniority, the younger workforce tends to value this kind of flexibility as it is less common that workers stay at the same company for the entirety of their careers. This plan will also allow Wilson Brothers to have a more accurate projection of what their pension costs will be. It is known that Wilson Brothers did not have any sort of pension fund set up for employees previously, therefore it was in the hands of the employees to plan for their retirement. However, I believe that long term employees should be compensated for their loyalty and years of service, at minimum they should be given a hybrid pension plan where they have the option to make contributions to the plan if they feel it is necessary, and are provided with retirement benefit based on seniority. For example, Wilson Brothers could use the average of their career earnings, plus give the option of making their own contributions with an employer contribution match.