A defined contribution fund is a retirement fund in which the member's benefit is whatever their contributions, plus the employer's, have grown to by retirement. The contribution is defined; the final benefit is not guaranteed.
What it means
In a defined contribution arrangement, the investment risk sits with the member: good returns mean a larger benefit, poor returns a smaller one. This is the most common modern structure, used by most pension and provident funds today, because the employer's obligation is limited to the agreed contribution rather than a promised payout.
Where it fits in
For payroll, a defined contribution fund means contributions are a percentage of pensionable earnings or a set amount, calculated and deducted each period. The fund's structure - defined contribution, defined benefit or hybrid - determines how the contribution is worked out, which the benefit fund setup captures.
Key rules
- The benefit depends on contributions plus investment growth.
- The member carries the investment risk.
- The most common modern retirement fund structure.
- Contributions are a set rate or amount, calculated each period.
