With defined benefit pension plans, employees know ahead of time the pension benefits they will receive (the benefit is “defined” or specified by amount or formula). The defined pension benefit itself is usually set by a formula that ties the person’s retirement pension to an amount equal to percentage of the person’s preretirement pay (for instance, to a fraction of an average of his or her last 5 years of employment), multiplied by the number of years he or she worked for the company.
Defined Benefit Pension Plan is a plan that contains a formula for determining retirement benefits.