Question

Under what circumstances can a pension plan provide too much incentive for the employee to work?

Answer 1

A pension plan may provide too much incentive for an employee to work, when the pension plan is a Defined Benefit (DP) pension plan.

Under a Defined Contribution plan, both the employee and the employer contribute toward the pension fund. But under a DB plan, the employer ensures a certain pension benefit after retirement, which depends on the employee's salary, number of years in service and similar variables. In this case, the longer an employee works, the more benefits she becomes entitled to after retirement. Also, the more efficient and capability that the worker exhibits in work, the more the promotion and advancement prospects, and the higher the salary, leading to increased pension benefits. Therefore, compared to a DC plan, a DB pension plan offers too much incentive for the employee to work.