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Defined Benefit vs Defined Contribution Pension in Canada

Updated

Most workplace pensions in Canada are one of two kinds, or a mix of both. This page explains how each works, with worked examples, and what each means for your RRSP room, for leaving the employer and for your pension in retirement. It is part of the workplace pensions hub.

How each type works

Defined benefit (DB)Defined contribution (DC)
What is promisedA pension set by the plan’s formulaNothing beyond the account balance
Who carries the investment riskThe planYou
What your pension depends onThe plan’s formula: usually years of service and earnings, or a flat dollar amount per year of serviceContributions and investment returns
At retirementA pension paid from the plan (or an annuity it buys)The balance buys an annuity, moves to a locked-in income fund, or is paid as variable benefits if the plan allows

The CRA describes them this way: in a defined benefit plan, “the terms of a defined benefit plan, or provision, guarantee a specified level of pension income to a plan member when he or she retires”; in a money purchase plan, “the pension benefits will be based on the total of the accumulated contributions and interest earnings.”

A defined benefit pension

Common formulas are a fixed dollar amount per year of service, a percentage of career-average earnings, or a percentage of final or best-average earnings times years of service.

A plan paying 2% of best-average earnings for each year of service, for 30 years of service and best-average earnings of $80,000: 2% × 30 × $80,000 = $48,000 a year, or $4,000 a month.

The Income Tax Regulations cap what a registered DB plan can provide: the defined benefit limit is $3,932.22 of yearly pension per year of service for 2026.

A defined contribution pension

You and your employer each contribute 5% of an $80,000 salary, $8,000 a year in total. If the account earned an assumed 5% a year after inflation, with contributions at the end of each year, after 30 years it would hold about $531,511 in today’s dollars. Lower returns, or a fall just before retirement, would leave less.

How each reduces your RRSP room

If you belong to a registered pension plan or a deferred profit sharing plan, your pension adjustment (PA) for a year, shown in box 52 of your T4, reduces your RRSP deduction limit for the next year; a PA can be zero but never negative, and a pension adjustment reversal (PAR) can restore room if you leave a plan having received less than your PAs counted.
  • DC plan: the pension adjustment is the total contributed for you in the year, yours and your employer’s.
  • DB plan: it is 9 times the pension you earned in the year, minus $600.

Both members earn $80,000; new RRSP room is 18% of that, $14,400, before the pension adjustment.

DB plan, 2% formulaDC plan, $8,000 contributed
Pension earned or contributed$1,600 of yearly pension$8,000
Pension adjustment$13,800$8,000
RRSP room left$600$6,400

Pension adjustments explained covers the pension adjustment reversal that can restore room if you leave a plan.

Leaving the employer

  • DB plan, federally regulated: In a federally regulated plan, a member who leaves is entitled to a deferred pension for the service and salary up to the date they leave, calculated in a similar manner and payable on the same terms as the plan's pension; provincial pension laws set their own vesting rules. A member of a federally regulated plan who leaves before they can start an early pension (10 years before pensionable age) can transfer the value of their pension to another pension plan that accepts it, to a locked-in retirement savings plan, or use it to buy a life annuity, by notifying the administrator within 90 days of leaving (a survivor has the same right if the member dies before then); once they can start a pension, this transfer right no longer applies (the plan's own terms may still allow one).
  • DC plan: the account balance, including vested employer contributions, can move to a locked-in account or another plan; the plan’s statement when you leave lists your options.
  • Plans under provincial law follow that province’s pension act. Pension or lump sum covers the choice for a DB pension.

Early retirement and survivor pensions

  • A federally regulated plan must let members start a pension from 10 years before the plan's pensionable age, based on service and salary to the retirement date; the plan may reduce an early pension, but its actuarial value can't be less than the pension that would have started at pensionable age.
  • In a federally regulated plan, a member who has a spouse or common-law partner when the pension starts receives it as a joint and survivor pension that pays the survivor at least 60% of the amount paid while both were alive; a form paying the survivor less needs the spouse's or partner's written agreement on the prescribed form.
  • In a DC plan, what a survivor receives depends on how the balance was used: an annuity bought with it pays according to its terms, and an account that hasn’t been converted passes to the survivor or beneficiary under the plan rules.

Inflation

Whether a DB pension rises with the cost of living depends on the plan. A pension that isn’t indexed buys less each year.

What a $3,000 monthly pension that isn’t indexed is worth in today’s dollars, at an assumed 2% inflation:

Years after it startsToday’s dollars
10$2,461
20$2,019
30$1,656

A DC balance has no built-in indexing; how it keeps up depends on how it is invested and drawn down.

Sources

The figures and rules on this page come from these sources, last checked against them between August 29, 2026 and September 30, 2026. How we check facts.