How your DB pension plan is calculated
Pension calculations are unique to each defined benefit (DB) plan. There are 3 main formula types, but there can be many variations to them.
3 main formulas
- Final average earnings
- Career average earnings
- Flat benefit
1. Final average earnings
This formula is based on your average earnings in the years leading up to retirement (for example, in the 5 years before retirement).
Sample formula – 2% x your average salary in the past 5 years x your years as a plan member. Here’s what your pensionPension A steady income you get after you retire. Some pensions pay you a fixed amount for life. Others save up money for you while you are working. You use that money to create income after you retire.+ read full definition would be if your average salary was $50,000 and you participated in the plan for 30 years:
| BenefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition percentage | 2% |
| Average salary | $50,000 |
| Years of plan membership | 30 |
| Formula calculation | $50,000 x 2% x 30 |
| Annual pension | $30,000 |
2. Career average earnings
This formula is based on your average earningsEarnings For companies, it’s the money they make and share with their shareholders. For investors, it’s the money they make from their investments.+ read full definition during the entire period you were a member of the plan.
Sample formula – 2% x your average salary in your career x your years as a plan member. Here’s what your pension would be if your average salary was $30,000 and you participated in the plan for 30 years:
| Benefit percentage | 2% |
| Average salary | $30,000 |
| Years of plan membership | 30 |
| Formula calculation | $30,000 x 2% x 30 |
| Annual pension | $18,000 |
3. Flat benefit
With this formula, your monthly pension benefit is equal to a fixed dollar amount for each year you are a member of the plan.
Sample formula – $50 x your years as a plan member. Here’s what your pension would be if you participated in the plan for 30 years:
| Benefit amount | $50 |
| Years of membership | 30 |
| Formula calculation | $50 x 30 |
| Monthly pension | $1,500
($18,000 annually) |
Some plans have inflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index.+ read full definition protection
Some plans increase pension payments to retirees each year to fully or partially match the rate of inflation. This is a highly valuable benefit because it helps your pension’s buying power keep up with rising prices over time.
Key point
Check your plan materials to understand how your pension is calculated.