A pension is a fund into which a sum of money is added and pooled during an employee’s employment years. This is to ensure that support is given to a person after his retirement in the form of pre-determined specific payments. A pension fund may be a defined benefit plan, whereby a fixed sum is determined according to a specific formula, based on the member’s salary and years of service. A Pension fund may also be a defined contribution plan, under which a fixed monthly sum is invested that then becomes available at retirement age. Pensions should not be confused with a severance pay or package. A package is usually paid as a lump sum after involuntary retrenchment and a pension provides an income for life at retirement. The fund also usually pays benefits when a member dies while still working, or is unable to work because of illness, or is retrenched.
Retirement plans may be classified as a defined benefit or defined contribution fund. A defined benefit plan guarantees a certain pay-out at retirement, according to a fixed formula which usually depends on the member’s salary and the number of years of service. These benefits are audited and calculated by actuaries. The retirement benefit of a defined contribution plan is determined by the contributions made as well as the investment growth and performance of the investment portfolio utilized. Therefore, with a defined contribution plan the risk and responsibility lies with the employee. The risk and responsibilities with a defined benefit plan lies with the employer or plan managers.