Startup Funding – How to Write a Pitch That Gets Your Business Funded

Have you ever wondered about how many startups actually manage to get funded? Fundable estimates that less than 1% startups are successful in roping in angel investors, and a miserly 0.05% garner funding from VCs. While this may seem extreme, anecdotal evidence suggests that for every 10 investments they make, VCs evaluate about 1,200 proposals.With odds that staggering, you want to give your start-up every possible competitive advantage when it comes to getting funded. One way to stand out from the crowd and beat the odds is to write a persuasive investor pitch.The trick to crafting a persuasive pitch is to understand what factors / parameters drive investment decisions. While the final verdict is governed by each investor’s investment thesis, investors as a community have certain shared expectations. The weightage they place on each individual factor will be different, but all these parameters collectively influence their decision.So, before you get to writing the pitch, let’s look inside an investor’s mind and decode what questions they are asking themselves in order to determine your potential. If you provide them answers up-front in your pitch deck, your chances of walking away with an investment are very high.#1. Does your idea / product / solution solve a real problem?• What problem are you going to solve?
• Is the problem real?
o Who has this problem?
o How prevalent is it?
o Will people pay money to make this problem go away?This part of your pitch will resonate if you tell real customer stories. If you came up with the idea because you yourself faced a problem or you saw someone struggling with this, then do tell the investors. A personal story is essential to selling and building faith in your idea / product / solution.


#2. Is your idea / product / solution the “Right Solution”?• What is the opportunity / promise in your idea?
• How many other approaches have you evaluated?
• What are the other solutions available in the market?
• What makes your solution better than the others?Example: Ventureast, one of the pioneers of venture funding in India, prefers to invest in businesses that scale and grow rapidly, leveraging their unique competitive advantage. For them to fund your idea / product / solution, you have to convince them that it is a real game changer.#3. Do market dynamics support growth?• How big is the overall market?
• Which segments of the market are you targeting?
• Are you making realistic projections / estimates about addressable market and your share of market?
• Do you have a plan to capture market share?
• Who is your competition?
• What is your plan to out-score the competition?Example: Zodius Capital, which has funded such successes as bigbasket, pepperfry and zivame, has consistently chosen to invest in Indian businesses that are capable of disrupting existing markets or creating entirely new markets.#4. What makes you and your team the right fit for this idea / product / solution?• What background does your team possess?
• Do you have a successful record of transforming ideas into revenue streams?
• Do you have special knowledge or skillsets in the domain?
• Are you aware of the micro-trends that influence / drive the industry you are in?
• How committed is your team?
• Will you be willing to take direction and pivot if the business needs to? In other words, are you coachable?
• Will you make compatible partners? Are your philosophies / values / approaches in tune with each other?Example: Ashton Kutcher, who invests through his venture capital firm A-Grade Investments, is clear that a great idea by itself does not lure him. To pique his interest, the founding team must understand their industry thoroughly, be resilient and be the kind of people whom he would like to hang out with.#5. How strong is your execution muscle?• Can you show traction? What gains have you already made – sales figures, # of users/sign-ups, conversions from free to paid customers, repeat purchases etc.?
• What is your revenue model? Are your financial projections healthy?
• What are you doing to acquire customers? How much does it cost?
• What is the lifetime value of a customer compared to the cost of acquisition?
• Are you forging any partnerships or ecosystem to fuel your growth?Example: Vanessa Colella of Citi Ventures believes in the power of execution, and its ability to separate the truly successful people from those who are smart, but can’t make it. If you have an idea that others have had, but know how to execute brilliantly, you have a good chance of getting funded as well.


#6. Do the rewards justify the risks?• Is your business in line with their philosophy and approach? How aware are you of the potential risks – regulatory, legal, copyrights, patent infringements, liabilities etc.?
• Do you have a plan to mitigate risks?
• Is the idea/solution/product on trend? What are the chances of a better or more advanced solution disrupting the market?
• What is the exit path? How (and how much) will the investor make a return?Example: Sequoia Capital’s Shailedra Singh defines his job as backing an underdog against the Goliaths of industry. He tries for a high success ratio by taking calculated risks and being willing to accept occasional failures; while also taking a 10-15 year view on investments.There you have it – a mind map to navigate the investors’ thought process and pre-empt their reservations. Keeping this framework in mind, you can craft a pitch deck that helps to persuade the investors (angels as well as VCs) that you have a potentially successful startup, and one that is worthy of their funding.Now all that is left is for you go forth and write a brilliant pitch. To quote the Hunger Games, may the odds be ever in your favor!

Life Improvement: When Is It Time Not To Plan?

Many of us have all heard the age-old saying that failing to plan is planning to fail. And many of us know the value and power that is found in setting goals, especially written ones. Every business guru, diet guru, sports guru… any guru… take your pick from the plenty there are… all of them stress one thing: have goals, will succeed. So we know this works. At the same time, we all hear of the importance and immense power of letting go, detachment. So we also know that this works. But it all sounds contradictory at first, doesn’t it? Well, it isn’t. The question then is, when is it time to plan, and when is it time to let go (not plan)? Put in another way, when does planning help you, and when does it harm you? When do things “go bad” not in spite of your plans, but because of them? That is the question, the answer to which will allow you to drop off the stress and worry baggage, stop unwittingly messing yourself up with plans made at the wrong place and time, and generally empower and free you a great deal.

Well, to begin with, it is a good time to define a plan so that we know what we are talking about. A plan is a vision; a template which when followed guarantees a certain outcome. It is a collection of cause-and-effect clusters that all work together to produce one final desired outcome. The essence inspires a vision that defines the becoming of a form, through process, that will hold the expression and experience of the essence that inspired it. That is a plan. Obviously, a plan with missing or incorrect inputs will not lead to the correct outcome,because it is not based on truth, on the Universe as it were, on the Laws It Works By. So you can imagine that an incomplete plan will work, but it won’t – it can only hope to approximate. Incomplete plans don’t work fully, no matter how one deludes themselves prior to the frustration of seeing the plan dashed against the rocks. Moving on, a plan made at the level of your ego is a personal plan. You make it because you have certain hopes and fears and you wish to avoid what you fear and make what you hope for happen. Without fear, you would rarely plan personally. Most plans are defensive; defensive against some imagined attack. A feature of a personal plan is that they have a future imagined “good end” to aim for and a “bad end” to avoid. Therefore, a personal plan is based on judgment (against yourself and others) and abstract assumed scenarios as part of its inputs. Its driving force is partially based on fear, as all things from the ego level are.

Here is a key point: personal plans are made from a vantage point that has no vision of all factors involved in all dimensions of space and time, and that is why the ego assumes things in an attempt to fill in the places it has no idea about. At this level of consciousness, you can only see what is right Here Now, and for most humans that is a tiny slice of eternity. Of all the millions of cause-and-effect components required to cooperate all across the universe for your desire to be fulfilled, your egoic self is only aware of a tiny percentage of them. That is why its plans are never complete. But then there is a part of You that is nonphysical and aware of all, all, the components and how they would exactly fit into the space-time continuum to guarantee that your desire is fulfilled. That part of You is Everywhere, that is why It Knows.

Now, I would like you to stop for a moment and remember the last time you had a flash of insight, an ah-ha that made you smile with delight at how smart you are. We have all had those moments where, literally out of the blue, we get it! You could be taking a piss while daydreaming about the ocean, when this brilliant solution for your business appears in a flash in your mind, and you get so excited! It’s a funny thing how they happen. Have you ever wondered why they come to you as finished plans? Seriously, remember the last time you had one. You did not construct it, put it together, or formulate it. You know, you did not put it together, block by block, until it became the genius idea that it was. You just found it all done for you, there, flashing in your mind. And you ran out and told your friends what you just thought of, never once stopping to consider just how you thought of it. Really, who put it together? Think about that. You found it complete, perfect for your needs. Who put it together with such wakeful intelligence that is aware of all that is involved so much so as to produce such a suitable idea? What about musicians? Many chart-topping artists report that they simply find the music in them; they hear it then write it. They don’t put it together; they more like report it. The same goes for many inventors, many artists, and so on.

By the time you get one of those flashes of insights, by the time it enters your mind, it is already a copy. The original is out there somewhere, where it was put together by One who has full vision and was capable of bringing to you what you had not managed to package together yourself. But remember, there is only One Mind, separation is a mental illusion, just like time is a mental illusion (time is thought “stretched” out into “space” to demonstrate and experience it; you recognize sections of eternity “at a time” to experience process, space demonstrated). You “heard” the thought, the inspiration, because you were listening, at that point empty in relation to the matter. If you remain empty, you could continue, day by day, to listen to the rest of the plan, which includes how to execute the vision, what inputs to use, when to make what move, and so on. The place where the original plan came from is your own Higher Mind, that part of your individuation that is still in perfect recognition of its unity with All That Is, the part of you that sees all and knows all, the part of you that is not in the experience called human, the divine essence. Now here is the greatest news: no divine plans are incomplete. None! So none can possibly fail when executed as planned. The Planner Sees All, Directs All. The only thing that can interfere (which means it introduces inefficiency to your personal experience) with a divine plan is a personal plan. This is not because a personal plan is more powerful; it is because the right to free will is upheld with the highest respect. You have heard many times that you have many aspects of you, some of which you are conscious of and others of which you are not. When they are not aligned, you experience conflict and confusion. So now we know the difference between a personal and a divine plan. A divine plan is not some plan made by some foreign god to impose on you; it is Your Own answer to your questions, from a level that sees all (Spirit) to one whose experience is one slice of the whole at a time (human). But it is all you. That is why those flashes of genius that you get are so complete, yet they are specific to the very problem or desire you had.

Now let us go back to this goal-making business. Personal plans have a function, but only when used to free the individual. It is the only time they can help you. And this is why. Imagine a person who feels like a victim (in anything, any area of life). They have given up hope. They feel powerless, incapable of making anything happen. Now, if something happens that triggers their courage or anger enough to make them decide to do what it takes to make things work for them, they begin to become self-reliant. They drop the victim mentality. They make a plan; a way in which they feel will get them out of their desperation. Now, every time a human has a desire, the non-physical part of that human starts inspiring this human with ideas from a divine plan, ideas which are guaranteed to work. However, if you have so much personal thoughts and emotions distracting you, you cannot hear these inspirations. You must still yourself. Like a calm pond, one which will instantly be aware of any rock thrown in. If you are like the Niagara Falls inside, you will not notice the rocks being thrown in.

Anyway, back to our example. This person, far from calm, will only hear parts of the plan being given them. They will, out of fear and a belief that they can fail, that there is some danger somewhere, they make a personal plan. They use inputs from inspiration, whatever they can hear and are not afraid to follow, and they also make up scenarios, imaginings based on their fears, and use these in the planning process. At the end of it all, what they invariably find is that the plan works in certain portions. They are elated! Even if not everything worked as planned, at least something worked! And this way, they rise out of desperation and can now start to direct their life. The point here is that from the place they were, the helplessness they believed to be in, any plan was a good thing. Any plan! And goals are great, because they give a point of reference, something to aim for. As you can see, even the worst personal plan, one with 10% success, is still a great thing for one who though they had zero power. It is something to celebrate and honor.

But then there comes a point where self-confidence and self- reliance is believed in enough to no longer be doubted. At this point, making personal plans becomes a great hindrance. Once you have proof that your life can be deliberately lived instead of under the idea that you are a victim of forces beyond your control, it is time to start using complete plans. That means that the ego’s personal plans are no longer useful. They were a crutch to remind you how to walk, with their goals and all, but now that you can walk on your own, you need a new tool to show you how to run and fly. That is a complete plan, a divine plan made by the higher aspect of Who You Are. You are much larger than you imagine yourself to be. Let us examine how this works.

Under the rule of personal plans, a person would ‘hear’ the insight, the flash of genius, stop everything they are doing, and excitedly run to the office to start planning how to make this plan work! They assume it is ‘my idea’ and ‘I must make it work against threat of failure’. They make plans which rely largely on assumptions (an assumption is anything that is not What Is) because they cannot see the Whole Picture. So by mere fact, their personal plans will have elements in them that interfere with the smooth progress of the original insight, the divine plan. This is where you start to fail because of your plans, not in spite of them. To begin with, you do not know what the vision you saw in your mind is for, its complete use to the entire universe. The universe is not personal; it works as a Whole. But the Original Source of the idea does. You also do not know what the millions of cause-and-event components required are; you can only guess a few of them. And you do not know at what points in the space-time continuum they require to be inserted for everything to work perfectly; but the Maker of the Original Plan does. Now watch how a personal plan messes you up at this stage. Your plan is based on dates and deadlines that you pull out of the blue. It is full of standards that you have determined indicate whether you have succeeded or failed. Let us say you miss a deadline, and something happens that is opposite of what you had hoped and expected. What happens to your ego then? Does it not rush to judgment, calling you a failure, asserting the belief that things can go wrong and that you need even more control, and increasing the level of fear and anxiety? So next time when faced with a similar situation, you put even more focus on what you fear and then it happens again! Simply because you focused on it and thus created it. It becomes a viscous cycle. And you keep reaching for more control. And you experience more stress instead of less. And fear increases. You never once to consider that there is nothing wrong with you or the universe, nothing unsafe. You never stop to consider that it is your personal plan that was grossly mistaken due to relying on a fear-created ego.

Now let us see why the most successful people all preach the power of letting go. Let us look at how one would proceed in the above example, but by listening.

A person would hear the insight, and automatically know or remind himself or herself that all divine plans are complete, all the way to the end. They know that the vision is complete in the Mind of the One, and it cannot ever fail. So it is simple. In the same way, they listened to and heard the great idea that made them all excited, they would remember that their copy is just a copy. The original is still out there, along with everything needed to make it manifest. So they would listen and wait. They would know that at the right time and place, they would receive the next piece of the puzzle. They would rest, not stressing about making plans to ‘make sure’ it happens. And it makes sense. If they did not compose the first idea, why can’t they trust that Whatever composed it will also give forth, at the right time, everything else needed to make it work?

Imagine the universe is a big circle and you are a little circle within that big circle. Now a personal planner assumes that the big circle is at war with him or her, the little circle. In their fear over this imagined state of things, they make up a phantom world in their mind, with assumptions about the future and how the rest of the universe will act and react, and they plan against this. It is so draining. One who does not make personal plans but listens to their higher aspect, on the other hand, sees the big circle as part of them, part of the whole, with only an intention to love them and make sure all is OK, because all is One. They have chosen to believe in peace and love rather than separation and scarcity. This is a choice, and it is the choice that allows them to let go. They realize that they are best served focusing on the little circle, their Here Now, which is what they have full knowing of. And they awaken within that circle that is them, here, now. They chose to put all their attention here, now, and because they do this, they are aware of their emotions and thoughts. Presence gives them the ability to control their here, now. So they choose, here now, always, to make their here now happy and well. Here, Now, they follow whatever cues come up, always deliberately choosing their thoughts and emotions, here now, and not throwing their mind into some imagined past or future. In other words, they make every here now moment golden, and because all life is a successive moments of infinite Here Now, their lives automatically work perfectly! You have seen them or heard of them. That is how they do it. Clarity, simplicity, power, peace, calm… all rewards of being present and following complete plans, letting go of personal plans once you recognize that their use as a crutch is complete. They become purely efficient, effortless.

Such people walk this earth without the baggage of plans and worries, and things work better for them! They recognize that the universe is not personal, yet it is only, only, loving and all else is our self-created illusions. Just because we do not understand something does not make that thing wrong. There are more things relating to your life than you are consciously aware of at this level of your existence. Remember that your life always creates the next moment of your experience out of your intentions. Whatever you give attention to grows. You are therefore held hostage by your own personal plans. So what is the point of your mind at this level, in relation to planning? Well, it is to execute that plans it receives, knowing with certainty that they cannot fail. It is to fashion all of your existence here into an appropriate vessel to execute these plans. The plans are already perfect. All they need is a suitable vessel to manifest through. You have to become a certain person for certain things to flow through you. It is this that you can use your lower mind for, by following cues from the higher mind. The attainment of success is not something that one comes by through chasing after success – it is something one attracts by the person they become. You form a vibration match with what you desire. It is an inner journey of transformation. You can call it education, training, skills, self-help, discipline… it is all an inner transformational journey resulting in a frequency match. It is guaranteed. That is all you have to do. The rest is done for you (admit it; you don’t know how it is done, how all those things are coordinated universally to make this amazing miracle called life work with predictability!)

You now have a progression of the use of various types of plans. In the beginning, personal plans can be used to establish self-reliance in a being that has lost hope. However, there comes a time when that crutch, the personal plan, because the very problem itself, the cause of failure instead of being the cause of success. That’s when its time to let go of the crutch. It is time to dare give trust a chance, to dare believe that the universe is loving (not dangerous, as you have been indoctrinated to assume) and see what happens! Give it a go! Find out for yourself. Let go, truly, a few times and listen to the plans as they come and see what happens! Gather your own evidence instead of holding on to personal plans because you are afraid something could “go wrong”. You don’t have to carry that huge unnecessary load. Drop it. It is very liberating! Try it a few times and see how you like it.

Health Insurance Rate Increases And Grandfathered Health Plans – Should You Go Down With The Ship?

Everybody is getting large health insurance rate increases this year. The size of the increase is making many people look for alternative health insurance plans. One type of plan is being especially hard hit with double digit increases, and those are grandfathered health plans. We’ll cover what’s happening and what you can do to protect yourself from the rate increases that are taking place.

You may be thinking, “What’s a grandfathered health insurance plan?” The answer is, if you have a health insurance plan that was in place on March 23rd of 2010, and you haven’t made any changes to your plan, you’re still in the same plan, then you have a grandfathered health insurance plan. If you’ve been in the same plan for 5, 10, 15 years, then you have a grandfathered health insurance plan.

Grandfathered plans have some special exemptions and characteristics, so we need to go over those in a little bit more detail. The easiest way to do that is to tell you a story about a recent client. That client’s name is Barry.

Barry and his wife are 52, and they have two daughters; one 21, and one that’s 16. Barry shared with me that their letter basically told them their new rate was going up almost 24% and they would be paying $1389 a month. They were in an Anthem PPO Share 5000 plan, and they’d been in that plan so long, he didn’t even remember when they actually started it. The rates had increased progressively from one year to the next.

But this year, the rates were finally high enough that he said he didn’t want to pay that much anymore, he wanted to find an alternative. So he called his agent, and then he called Anthem Blue Cross directly. In both cases, they told him to “just ride it out” and wait to see what happened in 2014, after the Affordable Care Act kicked in. That wasn’t an answer Barry was willing to live with because he wanted a solution today.

So when Barry called he shared the above information and his fear that he would have to pay higher rates. When queried about the health characteristics of his family, he said they were all healthy, and that other than one or two colds, they did preventive care and that was pretty much it. Their current plan was very rich in benefits that they weren’t making use of, based on what he’d described.

After running a set of quotes for the family, and scanning all of the different options, it became clear that one of the best options for them was the Health Net PPO Advantage 3500 plan. The reason is because it gave them two office visits for a simple copayment, and then all of the preventive care was free. That’s not something that they had in their PPO Share plan. They actually have to pay for their preventive care as part of their deductible costs in that plan.

The monthly premium on that Health Net plan was only $480 a month, so they were saving a little over $900 per month, or $10,900 per year. Barry really liked that. But he said, “There’s a big difference in benefits between these two plans. Can you show me a plan that’s a little bit closer to the benefits we have in our grandfathered plan, but at a lower cost?”

So looking through the list again, the closest match was the Cigna Open Access 5000/100% plan. It has a $5000 deductible and has unlimited office visits, which is very similar to the plan they currently have. But the monthly premium is only $928 a month. They could still save almost $500 per month, and $5500 in savings over the course of a year. Now, I don’t know about you, but saving $5500 to $10,900 is a pretty substantial amount of money for any family. Barry loved the heck out of that.

But he was still a little bit concerned. He said, “I like those plans, and I’m glad that there is an option that looks like it could save us a ton of money. But what am I giving up if I leave this grandfathered plan?” He needed to know what the advantages and disadvantage of a grandfathered plan are.

Advantages Of Grandfathered Health Plans

The advantage is that it’s outside of the Affordable Care Act. It’s not regulated, so it doesn’t have to have all the essential health benefits, and it doesn’t have to add all the extra benefits required by the Affordable Care Act. So hopefully, it’s going to have a lower cost. But that’s the only advantage of a grandfathered plan.

Disadvantages Of Grandfathered Health Plans

There are a number of disadvantages to grandfathered plans. First of all, they don’t free preventive care. For a family that has people over 50, that can actually be pretty substantial when you start looking at colonoscopies once every few years or so.

Secondly, in all health insurance plans, when it initially starts and gets to its largest size, there’s a pool of people that are inside of that plan. The premiums that the pool of people pay, covers all of the medical expenses for everyone in the plan. But over the years, as people leave that plan and move to lower cost plans or plans that better fit what they currently need, the number of people in the plan shrinks. This the typical lifecycle of a health insurance plan. At some point, the people that are left in the plan are either people that just never bothered to leave, or people that have health conditions that prevent them from being able to leave the plan. At that point in time, the rates for the plan start to climb much faster than the rates in other plans.

The last nail in the coffin for grandfathered plans is that because it is outside of the Affordable Care Act, come 2014 when the rates go up yet again, people on the grandfathered plans are not going to be able to qualify for subsidies. So they’re going to get no financial assistance at all, they’re going to have to pay for all their preventive care, and the rates on their grandfathered plan will increase again, so it probably isn’t going to make a whole lot of sense to stay in the old plan.

At that point in time, Barry was pretty much ready to change plans. He understood why his plan was going up so much; he liked the fact that there was a solution for him; and he actually started to get kind of frustrated. He said, “My agent and the Anthem Blue Cross representative both told me I should ride this out. Why did they do that? That doesn’t make any sense.” Not wanting to say something bad about somebody else, I told him that if he had asked the same question a year ago, I would’ve said to let it ride. Just stay in there and wait for more information, because nobody knew what the Affordable Care Act plans were going to be, and nobody knew what the rates were going to look like on the new plans.

However, a lot has changed since January of last year. During the summer and fall, the Affordable Care Act “metal” plans were described. Not the specific benefits, but what they’re going to look like in terms of benefit levels. The insurance companies, have given indications about what the pricing is going to look like for these new Affordable Care Act plans. What they’re saying is that the average cost is probably going to be anywhere from $300 to $500 per person each month. So for a family like Barry’s, it’s anywhere from $1200 to $2000 per month. The cost of the Affordable Care Act plans and his current grandfathered plan are pretty much even right now, and his plan is going to go up even more next year.

Barry decided there’s really no benefit to staying in his grandfathered plan, because he’s not going to get any subsidy help, and he’s not going to get free preventive care in the grandfathered plan.

The end of the story is that Barry’s family was accepted, and they were going to take a dream vacation this year, using some of that $11,000 they’re no longer paying to a health insurance company.

As you can see from this case study, it’s really important that you stay on top of what’s happening with the Affordable Care Act, because things are going to start moving very quickly this year. States and the feds are beginning to quickly build the exchanges, and the insurance companies are creating the new metal plans to go inside and outside the exchanges. Knowing what steps you should take to position yourself and your family to be able to make a smooth transition to the new Affordable Care Act plans is important.

If you have a grandfathered health plan there are some exemptions that you have to consider, along with determining where your grandfathered plan is in its lifecycle, to determine if it makes sense to stay with the plan you currently have, or if making a change is a better option. There’s no sense going down with the ship if you don’t have to.

How Does My Defined Benefit Pension Plan Work?

The Defined Benefit Plan used to be the standard for pension plans. Over the last 10 years, many companies have been phasing out these plans in favour of Defined Contribution Plans. Some companies may give you the option of switching between them as well, or converting from one type to another. This article is focused on the Defined Benefit Plan. If you start working for a company today, you will most likely be offered a Defined Contribution Plan unless you work for the public sector, a unionized environment, or a company with a long standing defined benefit plan.

How do I know the difference between the two plans? See the definitions below. The words in bold are terminology you will often see in the discussion of defined benefit pension plans.

Defined Benefit and Defined Contribution Plans Defined

A defined benefit plan is a pension plan where the future payout in retirement is defined by a set formula when you join the company. It is a calculation that usually includes your highest average salary, time working in the company, and how much money was contributed by you and the employer. The money is invested on your behalf and the firm is responsible for risk if something goes wrong. There is usually an implied rate of return that is guaranteed by your employer each year, which is the investment rate of return your money would earn if you could see your pension plan in a bank account.

A defined contribution plan is where the money you pay into the plan is defined: the amount contributed either by you or on your behalf by the company. It is a set dollar amount based on your salary in the year that you are working. You can think of it as the company (and sometimes you and the company) contributing to your pension account. This is similar to a Registered Retirement Savings Plan (RRSP) account, except that it is locked in. Locked in means that the money is in your name and you are entitled to the money, but cannot withdraw it unless there is a very exceptional circumstance. (i.e. this is the only money I have and I need to pay my bills). Also like an RRSP Account, you get to choose the investments in the defined contribution scenario, and you are taking the risks. If you invest in a fund and it loses money, you must deal with the consequences. It is for this reason that it is good to have a plan. If you are in a situation where you have a defined contribution account, you will have to make the decisions.

I know that I have a Defined Benefit Plan, What Now?

The good news is that defined benefit plans tend to work without many decisions being made on your part. This article is designed to make you aware of how they work so that you can be aware of potential changes and make decisions such as benefits changes, whether to stay at your employer a certain number of years, whether to transfer your pension to another institution, or convert to another type of plan (i.e. The Defined Contribution Plan). You may also be given warning if the promises that were made to you when you joined the pension plan get changed by the time you actually receive payment in retirement.

How Does It Work?

A defined benefit pension plan is basically a giant bank account, covering retirement for many employees in an organization over a long period of time. The employees and the employer contribute money every year, and this money is collected in this account. The entity that manages this bank account is called the plan sponsor. This account is typically run separately from the company operations, or from the institution it represents. For example, the GM pension plan is a separate entity from GM the corporation. The only relationship the pension plan and the underlying company should have is for company contributions, adding money to increase funding of the plan, or removing money over and above the projected amount needed to pay the present and future pensioners. If there is any other money transfer between the pension plan and the company, this should be monitored as it may signal funding problems, or a permanent change in the structure of the pension plan (for example company mergers, amalgamations or division split off from the parent company).

Once money is deposited into this bank account, it is invested for a long period of time to ensure that there is enough money to pay the future obligation. The amount of money promised to future pensioners is tabulated, and this amount is discounted back to the present, using an interest rate called a discount rate. This means that an equivalent amount of money invested in the current year is calculated to equal this expected future obligation. The calculation of the future obligation determines an expected rate of return which is the return necessary for the money sitting in the bank account to pay the future obligation and operate the pension plan. How do they know how much they will have to pay? This is where the actuary comes in. The actuary estimates how long people will contribute and withdraw money from the pension plan based on life expectancy, economic conditions, expenses of running the plan, the investment returns and inflation among other things to come up with a projected benefit obligation. The current health of the plan overall is measured using an asset-liability study, which is exactly what it sounds like – a study of the assets (money expected to be generated by the plan) and the liabilities (money that is expected to be paid out by the plan), or the funding situation of the pension plan. There can different versions of this calculation due to varying assumptions. If you are very keen, you can find the assumptions in the financial reports of your pension plan and see what the variations are. Since these calculations are projecting way out into the future, a small change in an assumption will mean a big change in the result. Keep an eye on this over the years to see what trends may be impacting the numbers. This asset-liability study also determines whether there is a surplus in the plan, or it isoverfunded (more money in the plan that the most current estimate requires to cover the future obligation) or a deficit in the plan, or it is underfunded (less money in the plan than the most current estimate requires to cover the future obligation). If a deficit becomes too large and stays there for a period of time, the plan may become insolvent. This is very similar to a company that goes insolvent because it ran out of cash and couldn’t sustain its business any longer. If this happens, the government may bail out the plan, but this depends on the jurisdiction, funds available and willingness of the government. The alternative is to wind up the planand whatever money is left over is divided among the stakeholders (the pensioners, contributors and entities that operate the plan). This is similar to a bankruptcy proceeding for a corporation.

Contributions

Contributions represent the money put into the pension plan by you and your employer. The contribution amount is usually based on a percentage of salary, and consequently the payout in retirement is also based on your salary. The specific calculation of the payout will vary for each plan – this should be checked with your employer. The retirement calculators provided at your workplace are very handy for figuring out your projected retirement monthly payout. Since the numbers are projecting well out into the future, unless you are within 5 years of your retirement, the numbers will likely change by the time you actually receive payments. The ratio of money you are contributing versus the employer will vary by plan and over time. Generally, the less you contribute, the better off you are if you receive the same benefits. Check your pay stub to make sure that the amount deducted equals the amount that should be deducted. If it is not, ask why. There may be some additional deductions or changes to the percentages that you may not be aware of. In some plans, you don’t see what the employer contributes – you only see what you have contributed. If you know the percentages of both parties, you can figure out how much you are actually getting. Also, for tax purposes, the company will reflect contributions from both parties on your tax slips, as the total dollar amount will impact RRSP contribution room and tax planning. Changes to contributions and benefits are usually reflected after union contract negotiations, or after asset-liability studies are carried out which determine how much money the plan will need to pay the pensioners, and how much you the contributor will need to pay.

Vesting

“Vesting” or “Vesting Period”is the time after which you are entitled to benefits or payment, either now or in the future. When you first join a pension plan, the first vesting period is the time when you are entitled to the employer contributions. It could be your first day of employment, or months and years out into the future from your first day of employment. There may be other vesting periods – times at which you are entitled to pension payments, or health benefits as well as pension payouts. Many defined benefit pension plans will include access to health insurance, and how much is covered is typically what you receive when you are working – but this varies and must be verified with your employer. There may be a vesting period for when you can take early retirement. This is usually called early retirement rather than vesting, but the idea is the same. If you stop contributing to the pension plan, you will lose anything that is not vested. Note that you may leave the company and return to the company but continue contributing in your absence. Whatever is vested can either be taken with you, or received as a deferred payment in the future. The tabulations that are done with the retirement calculators always assume you will contribute all the way up to your retirement without interruption. If you leave earlier, you need to calculate a deferred payment, where you input the start and stop date of your contributions, and how much money you put in over this period. If you are familiar with the concept of an annuity, this is very similar.

Indexing

When most pension calculations are done, it is assumed that there is no inflation in the numbers. If you see the term “real rate of return”, this interest rate would include inflation, and would equal the nominal rate of return, or typical interest rate that is quoted, minus the inflation rate. As an example, if you received a 5% return on your mutual fund last year, and the inflation rate was 2%, your real rate of return would be 5%-2% or 3%. Why does this matter? Typically pension payments are fixed – once a payment is calculated upon reaching retirement, it stays the same throughout retirement. The problem is that when you retire, you are supposed to have enough money to pay your expenses with this pension payout. If the rate of inflation is 2% every year up to your retirement, this is like saying you can buy 2% less stuff every year. If the promised pension payment is $2000 per month today, and you retire in 20 years, this 2% inflation rate would reduce the amount of stuff you can buy by 40% (2% x 20 years). If this continues while you are retired, say another 20 years, this money will now buy 80% less stuff than today. Imagine paying bills with 80% less money! Indexing raises the payout calculations by the amount of the inflation rate to prevent this erosion of monetary value from happening. Inflation is actually a very personal thing – the price increases of the stuff you personally spend your money on, is what will impact you the most. The pension plans assume that you buy the same quantity of stuff and in the same proportions as the average, or quoted inflation rate. This is likely not true, but it is better than no indexing at all. Some pension plans also have a maximum amount that they will index, or will not fully index but only partially. Check with your employer for the calculation to verify.

Early Retirement Special Features

Most plans have an option to retire early. They will usually combine how long you have worked there, or years of service with your age and determine a threshold for qualification for early retirement. If you retire early, the rules may change. They may give you a reduced pension for a period of time, or some other benefit. This is highly specific to your employer, so do the homework on this one. These features also change over time. The more the employer wants you to retire, the better an offer they will provide. Another indicator is that the more money the pension plan has, or the better the funding situation, the lower the contributions will be and the better the early retirement terms will be. The closer you are to retirement, the more these features will impact you. Retiring early is a very personal decision, as it will affect your retirement plan, tax status, income and employability. Make sure you plan carefully if you are offered early retirement, and do what is best for your needs.

RRSP Effect

The government views all of your pension accounts together when it comes to contribution room. The RRSP room that you are allowed will include defined benefit pension plan room, as well as all other types of retirement accounts. As an example, if you are allowed $12000 worth of RRSP room, and the defined benefit plan contributes $10000 in the relevant tax year (note that this includes your contributions and those of the company), you would have $2000 left for additional contributions to another type of retirement account.

What About the CPP?

The CPP contributions are also accounted for with your defined pension plan. The employer will account for the CPP limits when calculating your defined pension contributions. When you retire, the pension calculator that you use to determine how much money you receive in retirement accounts for CPP entitlements as well. How this accounting is done will depend on your salary and the CPP contribution calculations for the year in question. This would be another question for your employer. When you are retired, you would receive the CPP Payment and the Defined Benefit Pension payment separately, and the Old Age Supplement (OAS) if applicable.

What if I Leave the Company?

If you leave the company and you are vested, you can leave the money with your former employer, or take it with you to another institution. If you leave it with your employer, you will be able to receive it when you reach retirement age – this is called a “deferred payment”. It may also mean a series of payments over time – this is something I would ask the employer, especially if you will be retiring in the next 10 years. Since it is a pension plan, it will remain locked in until you are of retirement age. It would be kept separate from other non-locked in assets that you might have – like RRSPs, Tax Free Savings Accounts (TFSAs) or non-registered (cash) accounts. There are situations when you can combine locked in accounts from different employers into a single account. This should also be discussed with your current employer.

You can also combine defined contribution and defined benefit plans together in certain situations – if your current employer has a way of calculating the value of the contributions between the two (or more) types of plans. This is also possible between defined benefit plans of different types. Please ask your employer for the rules of their pension plan upon arriving or leaving a job to make sure you have all of the options open. You can also manage pension money yourself once you leave the employer. The money would go into a Locked in Retirement Account (LIRA), which can be managed by the same financial institutions that manage RRSP accounts. You can also turn this money over to a financial planner or broker if you believe they can manage your money more effectively than you can. There are usually time restrictions on making these transfers, and rules of protocol to follow, so please ask your company when you leave the firm and get the proper procedure so you can implement this strategy if you want to.

What If I Am Not Vested Yet?

If you leave the company before the vesting date – your funds will be returned to you but employer contributions will be kept by the company. For information purposes, keep track of how much you and the company contribute from when you joined the plan in the event of mistakes. As an aside, always keep your statements and print out hard copies of your records in case of issues with accessing your internet based accounts or loss of history. At the very least, have the records stored in your personal hard drive so they can be accessed without restriction. This is also a good idea for tax purposes. You want to be able to recreate your account situation from start to finish without relying on the internet, or any other parties to supply you with information.

In summation, the defined benefit pension plan is an integral part of your retirement. Even though it is managed by your employer, you should know what is going on and make decisions when appropriate.