For each year worked, the participant is credited with a percentage that will be applied against their final average earnings. At termination or retirement, the participant is entitled to receive a lump-sum benefit equal to final average earnings multiplied by the sum of the percentages earning during his or her career. The advantages and disadvantages of a pension equity plan, as compared to traditional DB and DC plans, are essentially the same as those of a cash balance plan. As compared to a cash balance plan, the pension equity plan generally provides larger benefits for longer service employees, since the benefit is based on final versus career earnings. Proponents of pension equity plans argue that employees more easily understand them as there are no account balances or contribution and interest credits to track.
Benefits are simply equal to a percentage of pay.
A disadvantage of pension equity plans is that there is no nondiscrimination safe harbor. As in a DB plan, the contribution required to fund this benefit on a level basis to retirement age is actuarially determined. At this point what has appeared to be a DB plan becomes a DC plan. Individual accounts are established to which the employer contributes the determined contribution annually. Investments are generally participant-directed.