What is generally true about defined benefit pension plans like those in larger companies?

Defined benefit pension plans typically promise a specified monthly benefit upon retirement, which is calculated based on a formula considering factors like salary history and duration of employment. One characteristic of these plans is that they are managed by the employer, who carries the investment risk and is responsible for ensuring that there are enough funds to meet future obligations to retirees.

The potential for a pension surplus arises when the investments made by the pension plan perform better than expected or if contributions made to the plan exceed the payouts made to retirees. This surplus can provide the company with added flexibility, allowing it potentially to reduce future contributions or enhance benefits under certain conditions. Thus, understanding that these plans can lead to a pension surplus reflects the underlying mechanics where the employer bears the risk and reaps rewards from effective plan management and favorable economic conditions.

In contrast, defined benefit plans do not rely heavily on employee contributions, as the primary funding responsibility lies with the employer. They are not owned by employees but rather funded and administered by the organization providing the plan. Furthermore, adjustments to these plans often require careful consideration and notice due to regulatory requirements and the nature of the commitments made to employees.