16.2 Types of Pension Plans

There are two general forms that pension plans can take: they can be defined contribution plans or defined benefit plans. A defined contribution plan refers to a plan where the employer pays a fixed contribution into a fund and has no further legal or constructive obligation to provide additional funds should the plan not have sufficient resources to pay the required benefits in the future. A defined benefit plan is simply any other post-employment benefit plan that does not meet this definition. Under a defined benefit plan, the employer does hold a legal or constructive obligation to provide additional funds to the plan if the resources are not sufficient to pay the required benefits. Accounting for defined contribution plans is quite straightforward, whereas accounting for defined benefit plans is more complicated. We will examine both types of plans.