Describe the types of pension plans most often found in governments and the differences between them.

Question

What will be an ideal response?

Answer 1

Pension plans are of two general types, defined contribution plans and defined benefit plans. A defined contribution plan specifies the amount or rate of contribution, often a percentage of covered salary, that the employer and employees must contribute to the members' accounts in the pension plan. The level of benefits payable upon retirement is determined by the total amount of contributions to a member's account and earnings on investments. Defined benefit pension plans provide a specified amount of benefits to a retiree based on a formula that may include factors such as age, salary, and years of employment. They are classified as either single-employer pension plans (pensions are provided only to employees of the employer) or multiple-employer pension plans (pension benefits are provided to the employees of more than one employer). Multiple employer plans can be further designated as agent or cost-sharing.