Pension benefits refer to a variety of retirement benefits that are payable to an employee by an employer. Calculating pension benefits for employees is important to make sure that your employees receive what they are promised. Many employees still count on pension benefits to supplement their retirement. Without these benefits, your employees will not have enough money to retire on. This retirement income can be calculated a few ways. You should know how to do this because, as an employer, you are the plan administrator.
Take the final year of your employee's earnings or average the best three or five years of your employee's earnings. Then multiply this number by the total number of years they have been in the plan. Then multiply this number by a fixed percentage that you choose. This is known as the final or best average calculation for employee benefits.
Calculate the average lifetime earnings of your employee. Do this by adding up every year of earnings for your employee while they were in the plan and dividing the total number by the number of years the employee has worked for you and been in the pension plan. Then, multiply the lifetime average earnings by a fixed percentage you choose. This will be the employee's monthly pension benefit and is known as the career average calculation.
Take a fixed dollar amount that you choose. Multiply this number by the total number of years your employee has been involved with the pension plan. This number will represent the monthly pension benefit for your employee. This method is called the flat benefit calculation.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007