Which type of a pension plan is National Pension Scheme

Solution

A Pension plan be either a defined benefit plan or a defined contribution plan. ·         A defined benefit plan is one which gives guaranteed retirement benefits irrespective of the returns generated by the pension fund. This is type of pension plan is usually funded by employers for its employees with retirement pay-outs as per a set formula based on salary, employees age, tenure of service. As such, here the amount of pension on retirement is already known. ·         A defined contribution plan is one in which the pension depends on the contributions made and the return generated on the investment made of those contributions. In this plan, the contribution made for the pension fund is defined or fixed. For example NPS or EPF where a fixed amount is contributed every month from the salary.