What does a final pay plan use to calculate retirement benefits?

A final pay plan calculates retirement benefits based primarily on an average of the employee's pay during a specified period leading up to retirement, typically focusing on the last few years of employment, such as the last 3 or 5 years. This methodology takes into account the possibility of salary increases toward the end of an employee's career, which can significantly influence the benefit amount.

Using this average pay approach allows for a better reflection of the employee's earning potential as they near retirement age and acknowledges the trend that many employees see their salaries increase as they gain experience. This can help create a more substantial benefit at retirement, as it rewards employees for their service in the last critical years before retirement while balancing fairness and predictability for the employer's budgeting.

In contrast, the other options do not align with the core principles of a final pay plan. Utilizing the average pay throughout the entire career or only focusing on the last year's salary would not effectively capture the earning increases employees often experience towards the end of their employment. Similarly, applying a fixed percentage of the final salary disregards the nuances of pay progression over time, which is crucial for accurately calculating benefits.