A method of calculating an employer’s contribution to an employee’s defined benefit plan. The employer calculates the contribution by multiplying an employee’s years of service by a percentage of his or her salary.
For instance, the company may provide 0.5% or 1% of the employee’s salary for each year of service. One advantage of this retirement plan contribution system is that employees are compensated for working longer at a company. However, many employers are reluctant to adopt this system because it requires the services of an actuary and, in turn, higher associated costs for the employer.
Definition courtesy of Investopedia