Defined Benefit Versus Defined Contribution Pension Plans: The Basics

When purchasing an existing business, many buyers are understandably reluctant to assume obligations under a target's defined benefit (DB) pension plan. Under a traditional DB plan, members (i.e. plan participants) are entitled to a guaranteed pension amount calculated by a formula. While active employees may contribute to such plans, each Canadian jurisdiction's laws place the employer squarely on the hook if the plan's assets are not enough to fund the promised benefits – and, as many of us have now seen, DB plans' current funding woes are well-publicized. In addition, DB plans are subject to a complex regulatory scheme and accounting rules that often have a negative effect on financial statements. For these reasons, many buyers undertake careful due diligence of a target's DB plans and, if appropriate, work with their lawyers to minimize these liabilities.