Defined Contribution (DC) scheme
Also written DC scheme · Defined contribution plan · Defined contribution pension
A retirement scheme where the contribution amount is fixed but the eventual pension is not — it depends entirely on the returns earned on the invested corpus.
In plain language
A Defined Contribution scheme flips the promise made by a Defined Benefit scheme. Instead of promising a fixed pension, it fixes only the money going in.
What comes out at the end depends on how well that money was invested. The employee — not the employer — carries the risk that returns fall short, or that they live longer than the corpus can support.
How it works
In a DC plan, a defined amount is contributed by the employee, the employer, or both, over time, into a pension fund. The final corpus determines the retirement benefit, taken as a lump sum, an annuity, or a combination.
A pension fund pools these contributions and invests them, over the accumulation period, across equity, corporate bonds and government securities as the scheme's guidelines permit. The size of the final corpus depends on the size and regularity of contributions, the returns earned (which depend on asset allocation), and the length of the accumulation period.
The key risk shift from DB to DC: the individual now bears both longevity risk (outliving their retirement assets) and investment risk (uncertainty in returns) — risks a DB scheme's sponsor used to bear. The DC scheme's Statement of Transaction (SoT), issued to every subscriber, is the tool that lets them track and manage this: it sets out contributions received, units allotted, the prevailing NAV, and the resulting corpus value, so the subscriber can decide whether to revise contributions, asset allocation, or the pension fund manager.
The NPS, applicable to central government employees who joined on or after 1 January 2004, is India's flagship defined contribution pension plan, with a Corporate model extended to private employers as well.
A worked example
Ms Gupta joins Central Government service in 2015. As a post-2004 recruit she is enrolled in the NPS, a DC scheme: 10% of her Basic+DA is deducted monthly, matched by a 14% contribution from the government, and both go into her individual pension account, invested according to her chosen allocation across equity, corporate bonds and government securities.
Her eventual pension is not fixed in advance. If her corpus grows well over 30 years of contributions and compounding, her pension at retirement will be higher than if returns disappoint; either way, the outcome depends on the invested corpus, not on a promised percentage of her final salary. Each year, her Statement of Transaction shows her exactly how the corpus is tracking, so she can increase her contribution or change her fund manager if the numbers are falling short of her retirement goal.
Why NISM asks about it
Chapter 1, section 1.1.1, sets up DC as the endpoint of the DB-to-DC transition and Chapter 4 (National Pension System) is the worked example of a DC scheme in practice. Expect a direct question on what a DC scheme's benefit depends on (the accumulated corpus, not last-drawn salary) and on which party bears longevity and investment risk.
Common exam traps
- "Contribution" is fixed, "benefit" is not — the reverse of a DB scheme. A question that describes a fixed pension outcome is describing DB, not DC, however the contribution is structured.
- Longevity risk and investment risk sit with the subscriber in a DC scheme, a direct reversal from a DB scheme, and this reversal is the workbook's central conceptual point.
- The Statement of Transaction (SoT) is the DC scheme's review tool — do not confuse it with an annual report or a tax certificate; its specific job is enabling a subscriber to catch a shortfall early.
- DC schemes are portable between employers, unlike many DB arrangements, which is part of why the workbook frames the shift as suiting a more mobile workforce.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- Accumulation stageThe working years, in which saving and investment build the retirement corpus — the stage where the ability to take risk is highest and where time, not contribution size, does most of the work.
- Longevity riskThe risk that a person outlives their retirement assets — living longer than the plan assumed, so the corpus runs out while income is still needed.
- National Pension SystemA PFRDA-regulated, defined-contribution retirement scheme in which the subscriber builds a market-linked corpus and must convert part of it into an annuity at exit; there is no guaranteed return.
- Defined Benefit (DB) schemeA retirement scheme where the pension amount is fixed in advance, usually as a percentage of last-drawn salary, regardless of how the underlying investments perform.
- Compound interestInterest earned on the original amount and also on the interest already earned. Rs 1,000 at 9% grows to Rs 31,409 in 40 years compounded, against Rs 4,600 with simple interest.
- Old Pension SchemeThe unfunded, pay-as-you-go defined benefit pension for government employees who joined before 1 January 2004, paying 50 per cent of last drawn salary plus dearness relief out of the budget.
- Employee Provident FundA mandatory retirement savings scheme where employer and employee each contribute 12% of basic pay, credited to the employee's own account and paid out as a lump sum at retirement.
- Government modelThe NPS model that mandatorily covers Central and State Government employees who joined on or after 1 January 2004, with a 10% employee and 14% government monthly contribution.
- Retirement corpusThe pool of money built up during a person's working years whose only job, after retirement, is to generate the income that used to come from a salary.
- Pension fundA managed vehicle that pools subscribers' contributions and invests them across equity, corporate bonds and government securities to build a retirement corpus — a registered intermediary under the PFRDA Act.
- Project OASIS ReportThe 2000 report of the S.A. Dave committee on old-age income security, which recommended moving India from unfunded defined-benefit pensions to funded individual accounts — the design the NPS was built on.