Defined Contribution Plan definition

A defined contribution plan is a pension arrangement whereby the amount the employer contributes on an annual basis is set. Individuals have their own pension accounts and the benefits accrued are dependent on the amount in the account plus earnings through investments made with the total capital.

Employees are also able to make contributions to the pension pot but these aren’t always defined at a set level. For some pension funds, the employer’s contribution is defined by its relativity to the employee’s contribution i.e. the employer will match the employee’s contributions up to a certain amount, often six percent.

Defined contribution plans are becoming more popular as they offer a lower risk profile to the employer than defined benefit plans.