The difference between a Defined Benefit (DB) retirement fund and a Defined Contribution (DC) retirement fund is really about who carries the investment risk and how your retirement benefit is calculated.
2025 04 09 benefit funds Great question
Defined Benefit Fund (DB) Defined Contribution Fund (DC)
Employer promises a guaranteed pension based on a formula
Retirement benefit depends on contributions + investment returns
Employer carries the investment risk
Member (you) carry the investment risk
Final pension is usually linked to salary and years of service Final benefit is based on fund value at retirement
________________________________________
Defined Benefit Fund (DB) — “Guaranteed Outcome”
How does it work?
• Your pension at retirement is pre-determined.
• It’s usually calculated like this:
Pension = Final Salary × Years of Service × % Factor
• Example:
If the formula is 2% × Final Salary × Years of Service,
and your final salary was R500,000 with 30 years of service,
your pension would be:
2% × 500,000 × 30 = R300,000 per year (for life).
Who carries the risk?
• The employer must make sure the fund has enough money to pay you that pension — even if investment returns are poor.
________________________________________
Defined Contribution Fund (DC) — “Defined Input”
How does it work?
• There is no guaranteed pension.
• What is guaranteed is the amount contributed (usually a % of salary from both you and your employer).
• The money is invested and grows over time.
• At retirement, whatever is in your fund is what you have — this amount will fund your pension.
Who carries the risk?
• You do.
• If investments perform well, your retirement benefit could be great.
• If markets perform poorly, your pension may be lower than you hoped.
________________________________________
Key Differences Summarised:
Feature Defined Benefit Fund Defined Contribution Fund
Guarantee Pension is guaranteed Contributions are guaranteed
Risk Employer bears the risk Member bears the risk
Retirement Benefit Calculated by formula (salary & service) Balance of contributions + investment returns
Predictability High (you know what you’ll get) Low (depends on investment performance)
________________________________________
Final Thought:
Defined Benefit = “Peace of mind but rare today”
Defined Contribution = “More common but more responsibility on you”
Would you like me to show this with an example or diagram?
Excellent! Here’s a simple example with a diagram to show the difference between a Defined Benefit (DB) Fund and a Defined Contribution (DC) Fund.
________________________________________
Example:
Let’s say:
• You work for 30 years.
• Your final salary is R500,000 per year.
• Contributions to a DC fund = 15% of your salary (you + employer combined).
• Investment growth assumed = 5% per year.
________________________________________
Defined Benefit Fund Example (DB)
The promise is:
Pension = 2% × Final Salary × Years of Service
So:
2% × R500,000 × 30 years = R300,000 per year pension — paid for life.
→ Guaranteed by the employer, no matter how markets perform.
________________________________________
Defined Contribution Fund Example (DC)
Over 30 years:
• Contributions = 15% of R500,000 = R75,000 per year.
• Contributions + investment growth (5%) → Final Fund Value = ± R5 million at retirement.
Your retirement pension will depend on how you invest this R5 million — e.g., buying an annuity or drawing down from the fund.
No guaranteed pension — it depends on investment returns, inflation, and how long you live.
________________________________________
Diagram:
Defined Benefit Fund (DB)
————————-
Employee ——-> Years of Service + Final Salary
|
Employer promises:
|
= Pension of R300,000 per year for life
(Guaranteed by employer)
Defined Contribution Fund (DC)
—————————–
Employee & Employer contribute R75,000 p.a.
|
Invested in the market (risk & growth)
|
Final Fund Value = R5 million at retirement
|
Retirement income depends on:
– Investment returns
– How long you live
– Annuity rates
________________________________________
Visual Summary:
Defined Benefit Fund → Focus = Outcome is known
________________________________________
Defined Contribution Fund → Focus = Input is known
________________________________________
Final Takeaway:
DB Fund DC Fund
Old-fashioned Modern standard
Employer risk Member risk
Predictable Uncertain
Less flexibility More flexibility, but more responsibility
________________________________________
Would you like me to create a proper infographic or PowerPoint-style slide of this for you?