Question

Differentiate between a defined contribution pension plan and a defined benefit pension plan. Explain how the employer’s obligation differs between the two types of plans.

Short answer

A provident pension fund Is the type of account that intakes the money an employer and an employee of an organization contributes towards the pension.

Step-by-step solution

Difference between a defined contribution pension plan and the defined benefit pension plan

Basis	Defined contribution pension plan	Defined benefit pension plan
Meaning	It is a pension plan where the entire amount of an employee's future pension is unknown.	It is a type of pension plan where the total amount of future pension is determined before the employee’s retirement.
Duration	The duration of the defined contribution pension plans depends on the value that the employee has invested into the pension account and how many years the amount can be fully utilized or eroded.	The duration under the defined benefit pension plan is indefinite.
Examples	Gratuity received, leave encashment salary	Public provident funds

Employer’s obligation differs between the two pension plans as

Under the defined contribution pension plan, the employer's primary responsibility is to contribute a certain percentage of money toward the pension plan in each financial year. The benefit gain or benefit loss arising from the contributions made by the employer are borne by the employee or the owner of the pension plan.

On the other hand, in a defined benefit pension plan, the employer must contribute an adequate amount of money to the pension plans to receive sufficient future monetary benefits.