Page 40 - Life Assurance

Defined Benefit Formulas:

In a defined benefit plan, the retirement
benefit is known, but the contributions will vary
depending on the amount needed to fund the
desired benefit. For example, assume a worker,
age 50, is entitled to a retirement benefit at the
normal retirement age equal to 50 percent of
average pay for the last two consecutive years
of earnings. An actuary then determines the
amount that must be contributed to produce the
desired benefit.

In a defined benefit plan, the benefit amount
can be based on career-average earnings, which
is an average of the worker’s earnings while
participating in the plan, or it can be based on a
final pay average, which generally is an average
of the worker’s earnings over two years period
prior to retirement.

When a new defined-benefit pension plan is
installed, some older workers may be close to
retirement. To more adequate retirement
benefits, defined-benefit plans may give credit
for service with the firm prior to the installation
pf the plan. The past - service credits provide
additional pension benefits. The actual amount
paid, however, will depend on the benefit formula
used to determine benefits.

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