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defined benefit pensions In economics, a defined benefit pension plan is a type of pension plan in which an employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending on investment returns. It is ‘defined’ in the sense that the formula for computing the employer’s contribution is known in advance.[1] In the United States, 26 U.S.C. § 414(j) specifies a defined benefit plan to be any pension plan that is not a defined contribution plan where a defined contribution plan is any plan with individual accounts. A traditional pension plan that defines a benefit for an employee upon that employee’s retirement is a defined benefit plan.
The most common type of formula used is based on the employee’s terminal earnings. Under this formula, benefits are based on a percentage of average earnings during a specified number of years at the end of a worker’s career.
In recent years, a new type of defined benefit plan, a cash balance plan, has become more prevalent. Under this type of plan, benefits are computed as a percentage of each employee’s account balance. Employers specify a contribution—usually based on a percentage of the employee’s earnings—and a rate of interest on that contribution that will provide a predetermined amount at retirement, usually in the form of a lump sum.
In the private sector, defined benefit plans are typically funded exclusively by employer contributions. In the public sector, defined benefit plans often require employee contributions.
Many companies with these plans face a deficit between the money currently in their plans and the total amount of their pension obligations. Contributions may be made by the employee, the employer, or both. The employer bears the investment risk. (Wikipedia Jan 2010)
'Defined Benefit' Pension Plans
By John Schroy, on February 26th, 2006 | 
The sponsors of ‘defined benefits’ pension plans controlled, as of December 2004, about US $2.5 trillion in equities. Common stocks, even after the crash of 2000-2001, were substantially over-valued. In order for stock prices to reflect values that were customary before the advent of stock buybacks, prices would have to drop between 20% (earnings basis) and 50% (dividend yield basis).
In the case of ‘defined benefits’ pension plans, this would represent a loss of between US$500 billion and US$1.2 trillion in market value of pension portfolios.
US Equities
By John Schroy, on February 25th, 2006 | 
Over 55% of corporate stock that belongs to US Households and Nonprofit Organizations is held indirectly through intermediaries who have the power to vote these shares.
The major holders of these voting powers are pension plans and mutual funds.
This means that it is not shareholder-owners that control most US public corporations, but hired intermediaries, each of which have conflicts of interest.
Retirement plans
By John Schroy, on February 23rd, 2006 | 
Between 1999 and 2002, US private pension funds lost US$ 1.2 trillion in value. It would almost seem that pension fund managers had been speculating with retirement money, attempting to beat each others’ short-term performance statistics, with little interest in safeguarding the assets of plan beneficiaries.
Political intrusion and trade unionism have debilitated the pension fund industry over many generations. The end of the pension industry may now be in sight.
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