The characteristics of your defined benefit pension plan
A defined benefit plan is a written contract by which an employer only or an employer and workers are required to make monetary contributions in view of providing the workers with retirement income.
The amount of your pension is set in advance according to a precise formula. The amount of the contributions (except member contributions in some cases) is determined by the actuary who carries out the plan's actuarial valuation.
You know in advance the amount of your retirement pension
In general, the amount corresponds to a percentage of your salary multiplied by the number of years of service recognized by the plan.
An actuary sets the amount of the contributions that must be paid to the plan based on the estimate cost of the benefits to be paid. Generally, a member's contributions are set in advance under the plan and the employer must pay the balance of the contributions required.
Note
that...
Most people who are members of a supplemental pension plan are members of a defined benefit plan.
Defined benefit: Who assumes the risk?
The risks related to funding the plan are mainly assumed by the employer.
As a general rule, the plan administrator decides how to invest the pension fund's assets.
Makeup of the pension fund
The pension fund is comprised of the employer's contributions and the members' contributions (if they are required to contribute). It can be thought of as the penson plan's "bank account".
How is your retirement pension calculated?
Various formulas can be used to calculate a retirement pension. The formula used for your pension must be clearly indicated in the plan summary.
Here's an example:
The salary used to calculate your pension is 40 000 $
You have 25 years of service
Your plan grants a pension of 2% of your salary for each year of credited service
2 % × 40 000 $ × 25 = 20 000 $
Your pension will therefore be 20 000 $ a year.
Do you want to find out more about your plan?
Consult your plan summary or contact your plan administrator.
Other useful information