Question

Question:

Distinguish between a defined benefit plan and a defined contribution plan. Why are the problems of accounting for post-employment health care benefits similar to those of accounting for pensions? Why, however, are post-employment healthcare benefits less tractable?

Answer 1

A defined contribution plan is when employer contributes a percentage of the employee's salary into a pension fund. This is easier to account for as the pension plan is usually independent from the employer and all risk is on the employee who decides what level of risk they want to impose one their portfolio. Meanwhile, a defined benefit plan is when the employer agrees to the amount that will be paid to the retirees , not the amount that will be contributed to the pension fund.

The problems for accounting for post employment healthcare benefits are even more interactable than those of pensions because the ultimate cost of postemployment healthcare benefits is subject to all of the uncertainties of ordinary pensions.