What type of pension plan provides benefits based on a formula involving years of service and income levels?

A defined benefit plan is a type of pension plan that guarantees a specific benefit amount to employees upon retirement, based on a predetermined formula. This formula typically takes into account the employee's years of service and their salary, often their highest or average salary over a specific period.

This structure ensures that employees have a clear expectation of their retirement income, allowing them to plan their finances accordingly. The plan is funded by contributions from both the employer and the employees, but the investment risk lies primarily with the employer, who is responsible for ensuring there are enough funds to pay the promised benefits.

In contrast, a defined contribution plan focuses on contributions made during an employee's working life rather than a guaranteed benefit at retirement, meaning the final benefits will fluctuate based on investment performance. A flat benefit plan provides the same benefit to all employees, regardless of their salary or years of service, which does not align with the criteria of calculating benefits based on income levels and service years. A career average plan calculates benefits based on average earnings over the entire career instead of the final salary, lacking the specific tie to service and income levels as seen in defined benefit plans.