A pension is a retirement arrangement in which an individuals employer promises them a regular payment from the day they retire, for as long as they live. It is a fund into which amounts are paid regularly during the individuals working career, and from which periodic payments are made to support the persons retirement from work. There are two main types of pension plans: defined benefit plans and defined contribution plans.
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Defined benefit plan: In this type of plan, the employer promises to pay a specific benefit amount to the employee upon retirement, based on factors such as salary and years of service. The employer bears the investment risk and is responsible for ensuring there is enough money in the plan to pay the promised benefits.
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Defined contribution plan: In this type of plan, the employee makes contributions, which may be matched by the employer. The final benefit to the employee depends on the investment performance of the plan. The company’s liability ends when the total contributions are expended.
Pensions are a type of employee benefit plan established or maintained by an employer or by an employee organization that provides retirement income or defers income until termination of covered employment or beyond.
