What is a Defined Benefit Plan?
A ‘Defined Benefit Plan’ is a pension plan in which a formula is used to determine the benefits received by the employee after retirement per month as a pension. In legacy pension schemes, the amount is decided by the employee’s finances.
In the case of a defined benefit plan, the formula involves a history of earnings, the final salary at the time of retirement, the employee’s age at retirement, and the duration of the service.
A major disadvantage of this plan is that it has an age bias in the sense that setting the plan for older employees would be costlier for the company as the aforementioned factors tend to be higher for older employees.