In a defined benefit pension plan, who takes on the investment risk?

In a defined benefit pension plan, the employer takes on the investment risk because they are responsible for ensuring that there are sufficient funds to meet the guaranteed pension payments promised to employees upon retirement. The benefits that employees receive are typically based on a formula that considers factors like salary history and duration of employment, rather than the performance of the underlying investments.

This arrangement means that if the investments underperform or if there are other financial issues impacting the pension fund, it is the employer's obligation to compensate for any shortfall. The employer must contribute additional funds to cover the promised benefits if the pension fund's assets are inadequate, thereby placing the investment risk squarely on the employer's shoulders.

In contrast, in plans where employees manage their retirement funds, they would assume all investment risks, which aligns more closely with defined contribution plans rather than defined benefit plans. Additionally, the role of pension funds as independent entities does not absolve the employer from risk in a defined benefit context, and the notion of shared risk does not accurately reflect the structure of these plans, where the employer retains primary responsibility for fulfilling the benefit commitments.