Defined Benefit Pension Schemes

These are occupational pension schemes, usually sponsored by an employer or the State. They will typically promise: –

  • A pension at retirement, usually linked to either pensionable salary near to the time of leaving the Scheme (whether by resignation or retirement) or total accumulated salary (usually revalued by inflation to retirement) as an employee. The former type of arrangement is referred to as a Final Salary Pension Scheme, whilst the latter type of arrangement is referred to as a Career Revalued Earnings Scheme.
  • A separate tax-free lump sum at retirement or the right to exchange some of the pension for a tax-free lump sum.
  • Some inflation proofing of benefits either in payment or in the period before retirement if a member leaves early (since 1986 this latter has become a compulsory right).
  • Spouses’ (widows’/widowers’) pensions (usually as a percentage of the member’s pension) on the member’s death either before or after retirement.
  • Lump sums on death before retirement, usually a multiple of the salary for those still in service or a multiple of the accrued pension for those no longer in service.
  • Ill health pensions on early retirement if unable to work.

Most older Public Sector Schemes, such as the Principal Civil Service Schemes, the Police Pension Scheme 1987, the Teachers’ Pension Scheme 2010, the Firefighters’ Pension Scheme 1992 and the NHS Pension Scheme 1995 (main scheme) are all Final Salary Pension Schemes. The NHS Pension Scheme (Practitioners Section), that is GPs and Dentists, and most newer Public Sector Schemes are both examples of Career Revalued Earnings Schemes.

The above schemes also provide full inflation proofing of the pensions in payment. In addition, they offer the right to transfer benefits from one Public Sector employment to another. Thus many Public Sector workers have benefits on retirement fully linked to their final salary, regardless of how many Public Sector employments they may have had.

Many Private Sector Employers provide Final Salary or CARE Schemes. However, in the recent times, many Private Sector employers have been withdrawing from providing Defined Benefit Schemes. They are being withdrawn primarily due to the cost of providing the benefits and running the Schemes. The cost is affected by a member’s final salary, increased life expectancy and the investment returns that can be achieved. The last few years have seen these costs spiral as a result of increased life expectancy and lower interest rates.