vesting and accrual

Two everyday questions about a pension are: how much have I built up so far, and is it actually mine to keep if I leave? Accrual answers the first — it is how your pension grows year by year as you work. Vesting answers the second — it is the point at which the pension you have accrued becomes legally yours, even if you quit the job.

Accrual is the steady building-up of benefit. In a typical defined-benefit plan, each year of service adds a slice — say 1.5% of final salary — so after 20 years you have accrued 30% of final salary; the figure 1.5% is the accrual rate. Vesting is about ownership and timing. Plans often say you must complete a minimum service period (for example, 3 or 5 years, sometimes immediately) before your accrued benefit (or, in a DC plan, the employer's contributions) is fully yours. Leave before you are vested and you may forfeit the employer-funded part; leave after vesting and you keep what you have earned, usually as a deferred pension payable from retirement age. For example, a worker who leaves after 2 years in a plan with 5-year vesting may walk away with nothing from the employer, while one who leaves at 6 years keeps a vested deferred pension.

Vesting and accrual rules shape both fairness and cost: shorter vesting protects mobile workers; faster accrual makes a plan more generous and more expensive. Actuaries must model how many members will leave before vesting (the withdrawal or turnover assumption) because forfeitures reduce the plan's cost. The honest caveat: 'accrued' and 'vested' are not the same. You can have accrued a benefit on paper that you are not yet entitled to keep — a distinction that surprises many job-changers.