Retirement
Understanding your pension plan - defined benefit vs. defined contribution
By Linda Lamarche, CFPⓇ 5 June 2025 4 min read
In addition to health and insurance benefits, many Canadian employers offer workplace pension plans as part of their employee benefits package.
A registered pension plan (RPP) is an employer-sponsored pension plan that meets certain registration requirements under the Income Tax Act and is also subject to rules under federal or provincial pension legislation. Over 6.9 million Canadians were active members of a registered pension plan in 2023, including 648,668 Alberta residents.1 Employer-sponsored pension plans are a significant component of retirement savings for many Canadians.
There are generally two main types of employer-sponsored pension plans available: defined benefit (DB) pension plans and defined contribution (DC) pension plans. Both plans have similarities, such as employer contributions and tax advantages, but there are also significant differences. If you are fortunate enough to be enrolled in a pension plan, it is important you understand the type of plan you are a member of and the impacts this will have on your retirement planning. This article provides a brief overview of each of these types of pensions.
Defined benefit plan
A DB plan is any pension plan that provides guaranteed lifetime income payments to a plan member during their retirement. The income amount is calculated by a formula specified in the plan that is tied to the employee’s earnings and years of employment with the employer. Governments and large corporations often provide DB pensions to their employees. The income payments from a DB plan may or may not be indexed to inflation. Employee contributions (if required) are usually set at a fixed percentage of employment earnings. The employer must then contribute sufficient additional money to ensure that the future pensions of plan members are adequately funded.
DB pension plan example:
Gerald worked for the University of Alberta, and is a member of the Public Service Pension Plan (PSPP).
The formula for calculating the retirement pension for members of the PSPP is:
((1.4% of highest average earnings up to the year’s maximum pensionable earnings (YMPE) plus (2.0% of highest average earnings over the YMPE)) x years of service
Gerald retired after 25 years of service. His highest average salary was $120,000 (and the average YMPE was $64,060). He is entitled to a lifetime pension of $50,391 per year, calculated as:
((1.4% x $64,060) + (2% x $55,940)) x 25 =
(896.84 + 1,118.80) x 25 =
$2015.64 x 25 = $50,391
Gerald’s pension is also partially indexed to increases in the Alberta Consumer Price Index (ACPI).
To learn more about DB pension plans please refer to Understanding your defined benefit pension plan.
Defined contribution plan
With a defined contribution plan, also called a money purchase plan, the amount of retirement income is not known but rather it is based on the value of your investments in the pension plan, which depend on the total contributions made and the investment returns on those contributions over time. As a result, it’s difficult to accurately predict how much pension income will be available to you at retirement.
In a DC pension plan, the employer, and often the employee, typically contribute a fixed percentage of the employee’s earnings into the pension plan. The employee then chooses from a variety of investment options and invests the contributions accordingly to align with their risk tolerance, time horizon and investment goals.
DC pension plan example:
Amanda is 45 years old and has become a member of a DC pension plan. Her employer contributes 4% of her salary to her pension. In addition the company will also match Amanda’s contribution to a maximum of 4%. Amanda’s salary is $110,000, and she contributes 4%. As a result, $13,200 is contributed to her pension each year ($8,800 from her employer and $4,400 from Amanda). As her salary increases so does the dollar value of the contributions. If we assume 1.5% salary increases per year and a 5% rate of return (after fees), and she retires at age 60, she will have accumulated almost $320,000 (today’s dollars) in her DC plan on a tax-deferred basis.
To learn more about DC pension plans refer to Understanding defined contribution pension plans.
The following chart identifies the main differences between defined benefit plans and defined contribution plans:
Hybrid plans
Some employers offer hybrid plans, which combine elements of both DB and DC plans. These plans aim to provide a balance between predictable retirement income and investment growth potential. For example, a hybrid plan might offer a base level of guaranteed benefits (DB plan) with an additional component that is based on contributions and investment performance (DC plan).
Other employer sponsored savings plans
In addition to pension plans, there are other employer-sponsored savings plans that may be available to you. Some employers may offer group savings plans or deferred profit sharing plans (DPSP).
It is important to understand all the resources that will be available to you in retirement, whether or not you have access to a pension plan. The ATB Wealth Retirement planning guide discusses additional sources of income available and is a great reference for your retirement planning journey.
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