Under this type of plan, the employee contributes a predetermined portion of his or her earnings (usually pretax) to an individual account, all or part of which is matched by the employer.
Some countries such as France, Italy and Spain face a ten percent probability of having a real replacement ratio of 0.25, 0.20 and 0.17 respectively.
[4] In addition, DC scheme participants do not necessarily purchase annuities with their savings upon retirement and bear the risk of outliving their assets.
Individual retirement savings plans also exist in Austria, Czech Republic, Denmark, Georgia, Greece, Finland, Ireland, Japan, Korea, Netherlands, Slovenia and Spain.
This may range from choosing one of a small number of pre-determined mutual funds to selecting individual stocks or other securities.
In exchange, the funds in such plans may not be withdrawn by the employee prior to reaching a certain age – typically the year the employee reaches 59.5 years old (with a small number of exceptions, such as retirement before that age) – without incurring a substantial penalty in addition to taxes.
This momentum has been employer-driven and is considered a response to a combination of factors such as pension underfunding,[7] declined long-term interest rates and the move to more market-based accounting.
Companies such as Aon Hewitt, Mercer and Aviva recognise these challenges and have identified the need to help new generations of workers with their retirement funding plans.
Defined contribution plans were introduced in Germany as part of the “Law Strengthening Occupational Pensions” (Betriebsrentenstärkungsgesetz) in July 2017.
[10] Defined contribution schemes have existed in Japan since October 2001, and as of March 2012 cover more than 4 million workers at about 16,400 companies.
[12] The CPF Board, a statutory authority established by legislation, runs this national pension fund.
All Government and Private sector organizations had to offer Provident Fund (PF) which is a type of Defined Contribution Plan.
Some large private sector organizations have also formed their Trust to manage the contributions received from its employees.