A contributory pension is a type of pension plan that includes regular contributions from both an employer and an employee. In many situations, the terms associated with contributory pensions do not make employee contributions optional. As part of the arrangement, the employee must make contributions throughout the course of the year in order for contributions from the employer to be credited to the account. This is especially true when the terms for the pension plan are based on some type of matching formula that requires employee contributions as a means of determining how much the employer will add to the balance of the account.
The terms of a contributory pension plan usually include some specific process for determining how much an employee can contribute during a calendar year. That maximum amount is usually based on a combination of limitations agreed upon between the plan issuer and the employer, and any governmental regulations that may apply to the administration of the plan. Those contribution limits may be in the form of a percentage of the employee’s salary or wages, or a specific monetary amount that cannot be exceeded in any calendar year.
With most contributory pension plans, the employer will also contribute funds that are above and beyond the money withheld from the employee’s pay and deposited into the pension. Depending on the structure of the plan, the employer may contribute an amount that is based on a percentage of the employee’s salary or wages, assuming that the employee meets certain criteria, such as working a minimum number of hours each week for a specified number of months in the calendar year. At other times, the employer may use a sliding scale that calls for the contribution of a specific amount based on the total salary and wages earned by the employee during the year, taking into consideration the total profits generated by the company during that same period.
In many nations, a contributory pension plan is considered an additional benefit of employment that serves as an incentive to work for a specific employer. This means that some employers will offer other types of non-contributory pension plans or even no pension plan at all. When this is the case and the individual still chooses to work for a company that sponsors no type of pension or retirement plan, the employee may seek to establish his or her own retirement programs independent of any work-related pension program.