Defined benefit pension plan formula allows an employee to calculate how much their retirement benefit might be. Defined benefit plans are typically the preferred choice for unions and employees as they promise a guaranteed monthly pension income in retirement. These type of plans are slowly being phased out as the plan sponsor assumes all the risk in making sure that this guaranteed monthly income in retirement is achieved. Below we’ve listed common formulas that pension providers utilize when calculating your benefit.
Amount of Benefits
The benefit that plan members could receive in retirement is determined by a formula that considers several factors such as length of employment and salary history. Companies and plan sponsors have different type of formulas that they follow but below are three common formulas.
Pension Rules and Regulations
Under current pension rules and regulations, Defined Benefit Plans may provide a pension benefit of up to 2% of earnings per year of service up to the following maximum amounts. (DB Limit)
| Year | MP limit | DB limit |
| 2020 | $27,830 | $3,092.22 |
| 2019 | $27,230 | $3,025.56 |
| 2018 | $26,500 | $2,944.44 |
| 2017 | $26,230 | $2,914.44 |
| 2016 | $26,010 | $2,890.00 |
Defined Benefit Pension Plan Formula
1. Final Average Earnings Formula
The final average earnings formula is based on your average earnings leading up to retirement.
Benefit = Benefit Factor x Average Earnings x Number of Years of Pensionable Service
Example: Dave worked with TD Bank for over 25 years. His average salary over the last 5 years has been 60,000 a year. Using a benefit factor of 2%, what is his annual pension?
- 2% x $60,000 x 25 = $30,000
2. Career Average Earnings Formula
This defined benefit pension plan formula is based on your average earnings throughout the time you were a part of the company’s pension plan.
Benefit = Benefit Factor x Average Earnings x Number of Years of Pensionable Service
Example:Mike worked with CIBC for over 30 years. His average salary over the 30 years was $55,000 a year. Using a benefit factor of 2%, what is annual pension?
- 2% x $55,000 x 30 = $33,000 per annum.
3. Flat Benefit Pension Formula
This is a defined benefit pension plan formula that where your monthly pension benefit is determined by a fixed dollar amount for each year you were part of the plan
Benefit = Flat Amount x Number of Years of Pensionable Service
Example:John has been working with Scotiabank for the last 35 years and has been a plan member since he started. His benefit amount is $40 per year for each year he is a plan member. What would be his annual pension?
- $40 * 35 = $1400 per month.
- $1400 * 12 = $16,800 per annum.
These defined benefit pension plan formulas are different than that of a defined contribution pension plan where the employee would be responsible in making sure that their retirement goals are met. Defined benefit plans are choice for most employees, however.
