Salary FYI

Defined Benefit Pension

Investing

A retirement plan in which an employer guarantees a specific monthly benefit at retirement, calculated using a formula based on salary history and years of service.

## Defined Benefit Pension

A defined benefit (DB) pension promises a specific retirement income, shifting investment risk from the employee to the employer. Once common in the private sector, DB plans are now primarily found in government and unionized workplaces.

### Benefit Formula

The typical formula multiplies three factors:

**Annual Benefit = Years of Service x Multiplier x Final Average Salary**

For example, 30 years x 1.5% x $80,000 = $36,000 per year in retirement.

### Funding

Employers contribute to a pooled fund managed by professional investors. The employer bears the risk of investment performance. If the fund underperforms, the employer must make up the shortfall.

### Global Comparison

| Country | DB Plan Prevalence |
|---------|--------------------|
| US | ~15% of private sector (declining) |
| UK | 10% open to new members |
| Canada | ~10% private, strong public sector |
| Japan | Still common in large firms |
| Netherlands | Mandatory occupational pensions |

### Key Risks

- **Underfunding**: Plan assets may not cover promised benefits.
- **Employer bankruptcy**: Benefits may be reduced (PBGC insures up to limits in the US).
- **Inflation**: Fixed payments lose purchasing power unless COLA adjustments are included.