A defined benefit plan is an employer-sponsored retirement plan that guarantees employees a specific monthly payment during retirement, calculated using a formula based on factors like salary history, years of service, and age at retirement.
Unlike defined contribution plans, where employees bear the investment risk, defined benefit plans put that responsibility squarely on your shoulders as the employer: You fund and manage the plan to ensure those promised payments are there when your team retires.
Think of it as a pension: you're essentially promising your employees a predictable income stream for life, which can be a powerful tool for attracting and retaining top global talent.
How it works
Here's how a defined benefit plan works in practice:
- Your company contributes regularly to a central pension fund on behalf of eligible employees. The goal? Build a pool of money that's professionally managed and invested over time.
- When employees retire, they receive a guaranteed monthly income that's locked in, regardless of how the stock market or other investments perform. The goal? Give your employees peace of mind and financial security during retirement.
Most defined benefit plans are funded entirely by employers, making them a valuable tool for recruiting and retaining talent. Some include employee contributions, though the structure varies by organization and region.
The key thing to understand is that you, as the employer, shoulder the investment risk. You are ultimately responsible for ensuring the fund has enough money to pay out all those promised benefits. It's a tall order! That's why defined benefit plans require careful planning and ongoing oversight.
Defined benefit plan vs. defined contribution plan
The fundamental difference between defined benefit and defined contribution plans comes down to who takes on the risk: you or the employee?
A defined benefit plan is a promise you make to your people: "We guarantee you'll receive this specific amount each month in retirement, no matter what happens in the markets."
- Risk: As the employer, you shoulder all the investment risk and funding responsibility, but your employees get rock-solid certainty about their retirement finances.
- Popularity: Depends on the region. In the U.S., these plans, once ubiquitous amongst large corporations, are now few and far between.
With a defined contribution plan, the script flips. You and/or your employees contribute a set amount to individual accounts, but the final retirement benefit depends entirely on how well those investments perform over time.
- Risk: Your employees carry the investment risk, which means their retirement income could vary significantly based on how the market performs, how the funds are invested, and when they retire.
- Popularity: Like defined benefit plans, location-dependent. They are standard in the United States among employers who offer retirement plans.
Should you opt for a defined benefit plan?
Like most things in life, there's no universal correct answer. It depends on your strategy, industry, and location.
A giant pro…
In a world where job-hopping is the norm and retirement security feels increasingly uncertain for many, and with fewer employers offering pensions, offering a defined benefit plan can make your organization stand out like a beacon to top candidates who value long-term stability. For example, IBM's announcement that it was reopening its pension plan made headlines in 2023.
Defined benefit plans are powerful for retention, as employees often need to stay with your company for several years to become fully vested.
…but many cons
The biggest hurdle with defined benefit plans is cost predictability. You're essentially writing a blank check for the future, with obligations that can balloon due to factors like longer life expectancies, poor investment returns, or changes in interest rates.
Administrative complexity is another reality check. These plans require ongoing actuarial valuations (is your fund performing as expected?), regulatory compliance (are you following the law?), and sophisticated financial management (is the money invested wisely?). This can strain your HR and finance teams, or has to be outsourced at a cost.
And we haven't even mentioned cash flow.
Unlike defined contribution plans, where you may contribute a set amount and you're done, defined benefit plans may require additional funding if the plan becomes underfunded, potentially creating unexpected financial pressure during already challenging periods. A Stanford report on public sector pensions in the U.S. found that "future pension obligations are being grossly undervalued-and the discrepancies are adding up" to about US$1.6 trillion.
Plus, for companies operating in multiple countries, managing a defined benefit plan becomes even more complex. Different countries have varying requirements for funding, reporting, and employee protections that must be strictly adhered to.
A word on legacy plans
Even if you're not offering new defined benefit plans today, there's a good chance you're still dealing with the costly and complicated legacy of past decisions.
You're not alone in this challenge. Many established companies find themselves managing "frozen" or closed defined benefit plans, where they've stopped enrolling new employees but still have ongoing obligations to current retirees and employees who earned benefits under the old system.
Considering a defined benefit plan for your global talent?
Expanding globally? Toying around with the idea of offering a defined benefit plan to your talent?
Geography matters more than you might think. Understanding the local landscape re: pensions is crucial. For example, in the EU, Canada, and parts of Asia, defined benefit plans remain far more prevalent and culturally expected than in markets like the United States.
When building international teams, you'll likely encounter statutory pension obligations or national schemes that already include defined benefit components. In plain English, it means you might participate in these systems whether you planned to or not (and there are lots of rules you must follow).
This is why understanding how local pension systems function is critical for accurate employment-related planning and budgeting. Pebl, an Employer of Record service, can help you navigate both cultural and legal nuances surrounding defined benefit plans in each market so that you can win the contest for top talent.
Need support crafting retirement plans that work for your employees, no matter where they live? Let's connect.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided "as is," and no representations are made that the content is error-free.
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