If I was starting out working I would want a Defined Contribution Pension plan rather than a Defined Benefit Pension plan. If you are young and are not working in an organization that you will stay in to retirement, you are much better off with the Defined Contribution Pension plan. This is because when you stop working for an organization and you are young you get very little from a Defined Benefit plan.
If you are young you get more money from a Defined Contribution Pension plan when you stop working for an organization. This is because with the Defined Contribution Pension plan everyone gets the same amount of money each year. If you are young under the Defined Benefit plan little is paid into the pension for you and you get little when you leave. Any benefit you earn is discounted back to the present day.
If you say that you do not know how to invest, you are young and you can learn by doing. Or you can cop out and use ETFs for Mutual Funds. Most Defined Contribution Pension plans provide options for investing your money. When you leave you get to take it all with you and can put it into a locked-in RRSP which you can completely control.
If you do not want to manage your money yourself you will have to pay someone to do so. No one works for nothing, so do not expect to have others do your investing for free. If you think that your organization would be better qualified to make the decisions for you, you could be very wrong. There are currently a lot of pension plans in trouble. The ones with the most problems seems to be those run by governments.
Chile has had an interesting experience in pension funding. An article by Orazio Attanasio , Costas Meghir, and Olivia S. Mitchell in Fortune Magazine talks about some proposed changes and makes the point that Pay-as-you-go (PAYG) retirement programs in the U.S. and many European countries are struggling. There have been mass protests by Chilean's about the low pensions people are getting. See an article by Laura Millan Lombrana in Bloomberg. .
There is quite a good article about Chilean's pension funding by Nicholas Vardy at Stock Investor. Certainly since the pension is government mandated, the government should have set rules about fees. Also, it is not a bad idea to get companies to contribute the employee's pension plans. There is very balance article on Chile's Pension problems by Andres Velasco at Project Syndicate.
Assuming that the government would have done better is foolish as shown by the many pension plans that are problems today. Mostly government liked to run pension plans because of all the money they can control. All the government plans were PAYG and they provided government with lots of money in the past. The problem now is that because of demographics, there are going to be more retirees than payers for these plans and something will have to be done.
Governments do not necessarily invest for the welfare of the pensioners. Look at Quebec where the government controls the pension plans of government employees. They invest money of this plan for political reasons. That is why the Teacher's Union in Ontario fought to control their pension money rather than have the Ontario Government do it. CPP seems better where they raised the rates in 2000 to try to move the Pension Plan from a strictly PAYG. The extra money is being invested by an independent board. However, a future government could change this.
Every system has its faults. In Canada we have RRSP accounts. I had one because I changed companies so I would not be retiring with a company pension. If you do a poor job of handling this account you suffer in retirement for lack of money. You also suffer if you do well as I did. A big percentage of my withdrawals go for taxes. The RRSP money increases my taxable income and puts me in a higher tax bracket. So I am not benefiting from managing my RRSP well.
On my other blog I wrote yesterday about ATCO Ltd. (TSX-ACO.X, OTC- ACLLF)... learn more. Tomorrow, I will write about High Liner Foods (TSX-HLF, OTC-HLNFF)... learn more on Wednesday, September 14, 2016 date around 5 pm.
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