What is a Defined Benefit Pension Plan?

Employer pension plans usually fall into two categories: defined benefit (DB) plans and capital accumulation plans such as defined contribution (DC) plans and group RRSPs.
Under a defined benefit plan, the benefit you receive at retirement is based on a predetermined formula that takes into account your earnings and your years of membership in the Plan. You receive a monthly pension payable for life.
Defined benefit plans offer a good level of security to plan members:

• The member’s pension is not directly affected by financial markets and the economy.
• The employer is responsible for the financial health of the plan and assumes the greatest share of the risk.
• Members do not have to worry about running out of money because the pension is payable for life.

	Defined benefit plans	Accumulation plans
Contributions	Defined benefit plans may or may not require that you make contributions. The employer contributes a sufficient amount, in addition to members’ contributions, to finance all benefits payable to plan members. Contributions are deposited in a pension fund. The employer must ensure that the plan can meet its commitments. An actuary performs a valuation of the plan at least once every three years to determine the contributions the employer must make to maintain the financial health of the plan.	Your contributions and the employer’s contributions are defined in advance and deposited in an account in your name.
Investments	The employer decides how the money in the pension fund is invested and assumes all the investment risks.	You decide how the money in your account is invested and you assume all the investment risks.
Retirement benefits	At retirement, you receive a lifetime pension calculated using a predetermined formula based on your earnings and plan membership. Your pension is known in advance. It will not be affected by interest rate fluctuations or investment returns.	At retirement, you are entitled to the amount accumulated in your account. This amount will depend on a number of factors, including how much you and the employer contributed over time and the return on your investments. You can transfer this amount to a personal retirement income vehicle or use it to purchase an annuity.