Occupational Defined Benefit Schemes

Apart from defined contribution schemes (see Occupational defined contribution schemes), some employers offer their workers defined benefit schemes (see Occupational Pensions). A defined benefit scheme enables savers to accurately forecast their annual pension when they come to retire. There are three main types of defined benefit scheme: final salary (see Final Salary Schemes), career average salary (see Career Average Salary) and cash balance (see Cash Balance Schemes). Defined benefit schemes usually provide you with a pension which is based on:

• how many years you have been in the pension scheme: also called your 'pensionable service'
• your salary; perhaps averaged over your last three years before retirement or over your career with the company in question
• the accrual rate, that is, the percentage of your salary that you are entitled to per year of membership e.g. you are entitled to 1/80th or 1/60th of your final salary for each year of pensionable service.

The defined benefit schemes usually operate in much the same way as the defined contribution pension schemes. You make regular contributions to the scheme, your employer also contributes, and these contributions are all invested with the aim of making enough money to finance your annual pension when you come to retire. However, with a defined benefit scheme, the investments made are generally not dictated by you but rather by the pension scheme fund managers. Other personal pension schemes may offer you the chance to choose your own investments, but an occupational defined benefit scheme will usually manage investments itself because the amount of pension you receive is agreed on initially and is not dependent on the performance of your investments. The value of your pension fund when you come to retire will not influence the value of the pension that you receive; this is determined by the initial contract that you have signed. Some occupational defined benefit schemes may not require employees to make any contributions: the employer will cover the full cost of the annual pension when the employee reaches retirement age. It is very rare however, that you will not be asked to contribute to your own pension scheme.