Cash Balance Schemes

A cash balance scheme works in much the same way as a money purchase, or defined contribution scheme (see Personal Pensions). However, cash balance schemes are occupational pension schemes (see Occupational Pensions), and it is your employer who takes the risk of your pension fund investments performing well or not. In a cash balance scheme your employer offers you a certain amount of pension fund for every year you are a member of the pension scheme. If the contributions made to the pension scheme do not earn sufficient investment returns to provide you with the pension fund promised by your employer you will still be entitled to receive the promised pension fund: your employer will have to cover the cost.

When you come to retire you will be entitled to your total pension fund as a lump sum, to use in order to buy an annuity for your retirement (see Annuities). Whilst employers cover the risk of investments under-performing and promise employees a specified pension fund on retirement, employees must bear the risk that the annual pension their pension fund is able to buy them when they come to retire may be of a high or low value depending on the economic conditions at the time.

Cash balance schemes are sometimes referred to as hybrid schemes, because they combine aspects of defined contribution and defined benefit schemes (see Occupational defined benefit schemes). Some companies make hypothetical contributions, that is, they do not set money aside each year for member contributions but promise to pay a cash sum equal to the amount they would have contributed when their employee comes to retire. However, there is some controversy at the moment about the way in which cash balance schemes are allowed to work and the way they should work.

For details of the amount you can expect to receive from your cash balance pension scheme see How much will I receive?