What is a pension plan primarily based upon?

A pension plan is primarily based on salary and length of service because these two factors directly influence the benefits an employee will receive upon retirement. Typically, the final benefit amount is calculated using a formula that takes into account the employee’s earnings, often focusing on their highest salary over a specific period, and the total number of years they have contributed to the pension plan. This approach helps ensure that employees who have dedicated more years to the company and have earned higher salaries will receive a correspondingly larger pension payout when they retire.

In many pension plans, the goal is to provide employees with a stable income during retirement that is reflective of their working years and contributions to the company. Understanding this relationship highlights why salary and length of service are critical components in determining pension benefits.