Defined benefit
A pension promising a specified payment, so the employer carries the investment and longevity risk rather than the employee.
Where you will meet it
Defined benefit appears in 9 learning outcomes on the CFA syllabus. A few of them:
- Explain defined benefit pension obligations and how they flow through the statements
“A defined benefit plan promises a specified benefit, so the employer bears the investment and longevity risk.”
- Set out the kinds of investor and the particular needs of each
“Defined benefit pensions have long horizons and defined liabilities, which makes the liability rather than an index the natural benchmark.”
- Contrast the different forms of pay given to employees
“Post-employment benefits split into defined contribution plans, where the employer's cost is simply the agreed contribution and the employee bears investment risk, and defined benefit plans, where the employer promises a future benefit and so carries the investment, longevity and discount rate risk.”
- Set out the risk measures relied on by insurers, pension funds, asset managers, and banks
“Defined benefit pension funds care most about the surplus, assets minus liabilities, so they use surplus at risk, duration mismatch against liabilities and stress tests of the funding ratio.”
See also
Practise it
Practise defined benefit until it is automatic: questions that explain every wrong option.
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