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 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. 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’) 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.
- Ill health pensions on early retirement if unable to work.
The Public Sector Schemes, (the Civil Service Schemes, the Local Government Pension Scheme, the Police Pension Scheme, the Teachers’ Pension Scheme, the Armed Forces Pension Scheme, the Firefighters’ Pension Scheme and the NHS Pension Scheme (main scheme) are all Final Salary Pension Schemes. The NHS Pension Scheme (Practitioners Section), that is GPs and Dentists, and the Additional State Pension Scheme 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 Schemes. However, in the recent times, many Private Sector employers have been withdrawing from providing Final Salary 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 They are being withdrawn primarily due to the cost of providing the benefits and running the Schemes.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.