A defined benefit pension plan specifies the benefits to be received by retirees (employees) in the future in terms of factors such as employee age, years of service, and salary levels.
The employer’s pension cost is based on estimates of those defined benefits earned during he period that will be paid in the future. Employer contributions, employee contributions (in some cases), plus earnings on investment made with plan assets are accumulated to provide the promised benefits.
However, in an important distinction from defined contribution plans, in defined benefit plans, employer contributions to the plan do not satisfy its obligation. The employer is still obligated to provide the retirement benefits and therefore the employer retains investment and actuarial risk.
Many variables must be estimated to determine the periodic pension contribution required and the pension cost to recognize. These estimates are actuarial and investment assumptions.
Accounting is more far more complex for a defined benefit plan than for a defined contribution plan because of the many actuarial and investment variables that must be considered.« Back to Glossary Index