Introduction
The insurance agencies offer pension plans aimed at providing employees various forms of opportunities to fund their trust investment. This amount of money is usually paid to the employee after retirement basing on the amount agreed upon. Such contributions are established in respect to the annual fixed amounts revised each year or a fixed proportion of organizational profits. The defined benefit plans have been adopted by the highest population in Canada. Essentially, many organizations provide health insurance plans to the workers in groups as a shield against risks and advantages of working with many people. The firms offering such shields aim at attracting skilled and experienced employees in cases where government policies are not mandatory. The contributory options engage employees who participate in raising money meant for group insurance. The employees may fully make the contributions or participate in raising the money with their employer. On the other hand, the non-contributory options involve an employer who produces the full amount of money required for employee plans. This paper describes these ways of funding benefit options basing on these 3 options of contribution.
Noncontributory Options
In this case, the employer takes full charge of the cost undertaken in funding the benefit options, implying that the salaries of the employees are not reduced to cater for insurance covers. The employees’ salaries are not deducting money for pension plans.
Advantages
This plan allows the low-salaried employees to get covers that are similar to those of high-waged people. The maintenance of the plan from an employer’s perspective is cheap that others tracking the individual contributions of workers.
Disadvantages
However, the plan reduces the coverage of employees basing on their options that do not match individual or group needs. The decision is made from one point of view without seeking the consent of the insurance holders. Such insurance are incomprehensible in meeting individual health and pension needs. The plan commences with enrolling an individual as an employee in a non-voluntary perspective. Firms offering this form of insurance in Canada calculate the benefits depending on the employee’s monthly payments. The pension plans based on this model demand the employer to calculate the actual amount of benefits from the current salaries and forward it for investments. The invested amount of money takes a period of years as the minimum period to receive the benefits.
Contributory Options
Advantages
This option offers the employees a typical cover without the need of medical records and assessments before getting pension coverage or insurance. Furthermore, since the employees and employer are taking part in the contributions, they can take advantage of economies of scale in order to foster comprehensive coverage. In Canada, the defined benefit options are the most common where about 85% of the government institutions used it as compared to 59% private institutions offering contribution plans. The report also informed that group contributions covered 37% of all firms providing the options. This increased use of contribution plans, instead of benefit plans arose after inflation of the 1970 to 1989 (Hiles, 2011).
Challenges
The money set aside to cover pension plans had lost its value making the contributions higher while striving to cover the losses due. The defined contribution plans do not have such issues because there are no specific pensions revealed to the participants. In the contributory option of the two plans, the employee has to isolate some money to pay the pension plan charges. The amount is deducted from the monthly income of the employee in order to make investments. The maturity of the vesting period is 5 or more years of involving an employee in constant payment of the investment amount each month. The limits must be concise in order to limit the participation of employees.
Disadvantages
Essentially, the amount of money used to pay the pension plan charges is subject to taxation since the money enters the individual’s bank account first before any deduction are made. The option may trigger the employee to seek an alternative individual pension plan depending on personal interests that may not be applicable for non-contributory pensions. Furthermore, the variations of monthly contributions on the plan provide limited choices for the workers.
Fully Contributed
When the employee makes full participation in the funding of pension plan, such a contribution is termed as fully contributory option. Some organizations do not assist employees to pay the monthly costs of their pensions. Although they may organize to facilitate the economies of scale, the plans appear as individual pensions. This model may encourage the employee to seek external pension plans since the employer does not play active roles in encouraging employee retention and motivation.
The payments of an individual plan may be closer to the price offered by the firm’s economies of scale. However, many researchers have classified this pension funding as a contributory funding option except Long (2005). Essentially, the model is similar to individual plans where some insurance organizations may offer better prices than other ones being offered under company’s grouping. However, grouping has an advantage of bargaining power where there is comprehensive coverage and abilities to seek returns after retirement. In Canada, few organizations practice this model of pension plan since it does not offer advantages for the organizational future. In this respect, organizations prefer cutting on the salaries of employees in order to offer amicable pension plans within their terms and economies of scale. It is not an approach used by many firm located in Canada as well as other countries across the globe.
Conclusion
Organizations tend to develop plans that can enclose the need of people to retain their employment and pay attention to the organizational needs. The establishment of an effective pension plan can hold employee within an organization in order to prevent losses associated with pension maturity and its loss in case a person fails to retire. For instance, an employee may fear to be fired in order to protect the pension accumulated over a period of years. This aspect dictates that a company has managed to hold its employees within its working dimensions and prevent the loss of skilled and experience human resource.
This paper has shown three options that can be used to fund pension benefits. These options include the contributory option where the employer and employee participate in raising the money required for employee pension. However, some organizations leave the employees to raise the money together in an option referred to as fully contributory. The contributory option is a shared option where employer also participates. Lastly, the noncontributory involves pensions managed and paid by the employer alone. Employers use this strategy to attract experts into their organization for such added advantages. In this respect, the funding options available for employee pension coverage have been discussed in the research.
References
Hiles, A. (2011). The definitive handbook of business continuity management. Chichester, England: John Wiley & Sons.
Long, R. J. (2005). Strategic compensation in Canada. Toronto: Nelson.
