In a defined benefit pension plan, which party bears the investment risk?

In a defined benefit pension plan, the employer bears the investment risk. This structure means that the employer is responsible for ensuring that there are sufficient funds to provide the promised retirement benefits to employees, regardless of the performance of the investments held in the pension fund.

If investment returns are lower than anticipated, the employer may need to make additional contributions to meet the obligations of the plan. Conversely, if investments perform well, it may reduce the employer’s future funding requirements, but the risk of poor investment performance lies entirely with the employer.

This contrasts with defined contribution plans, where employees typically bear the investment risk as their retirement benefits depend on the performance of their individual accounts. In essence, the defined benefit plan specifies the payout an employee will receive at retirement, placing the onus of managing and funding the plan on the employer.