Question

Are there any differences in the effects of a defined benefit superannuation scheme from a defined contribution superannuation scheme for a firm and its accounts? Explain

Answer 1

Both these retirement accounts are employer-sponsored retirement plans and are also known as superannuations.

Defined-benefit plans define the retirement benefit ahead of time. It will be a monthly payment in retirement which is based on the employment tenure and salary of the employee. This plan guarantees a specific retirement benefit for the employees. Usually, the employees do not have individual accounts and they are not expected to contribute to the plan. Their right is not to an account, but to a stream of payments.

But in the case of defined-contribution plans, the benefit for the employee is not known. The contribution to the plan is known and the employees do have individual accounts. The contribution comes from the employee and within the rules of the plan, he can withdraw or transfer the fund. Many employers also make contributions to the account. The amount of benefit at the time of retirement is undefined.