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Employee benefits

Pension plans

1.1 Types of pension plans

There are two broad types of pension plan:

 defined contribution plans

 defined benefit plans.

The accounting treatment of these plans is very different.

1.2 Definitions

Defined contribution plans are where the entity pays fixed
contributions into a separate entity and has no legal or constructive
obligation to make further contributions.

A defined benefit plan is one which is not a defined contribution plan.

Example 1

An entity pays fixed contributions of 5% of employee salaries into a pension
plan each month. The entity has no obligation outside of its fixed contributions.

The lack of any obligation to contribute further assets into the fund means that
this is a defined contribution plan.

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