Lesson 5 of 7 · 14 min
Defined contribution and defined benefit pension plans
In a defined contribution plan the company's expense is simply what it pays in, while in a defined benefit plan the company carries the funded status on its balance sheet and splits the yearly change between profit or loss and other comprehensive income.
In short
- Salary, bonuses and most non-monetary benefits vest at once: expense when earned, cash or a current accrued liability. Deferred compensation (pensions, share-based pay) vests over time and needs estimates.
- Defined contribution (DC): the contribution is defined; employees bear investment and actuarial risk. Expense = contribution; operating cash outflow.
- Defined benefit (DB): the benefit is defined; the employer bears investment and actuarial risk.
- Balance sheet: net pension liability (asset) = PV of defined benefit obligation − fair value of plan assets. Deficit → liability; surplus → asset.
- IFRS: service cost + net interest in P&L; remeasurements in OCI, never recycled. US GAAP: service cost + interest cost − expected return in P&L; past service costs and actuarial gains/losses go to OCI and are amortised into P&L.
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