7A DEFINED BENEFIT SCHEME VERSUS DEFINED CONTRIBUTION SCHEME

Occupational pension schemes are either a defined benefit (“DB”) scheme or a defined contribution (“DC”) scheme. Nowadays, DC schemes are most common. A DB scheme promises a fixed benefit on retirement.

The benefit is broadly based on an employee’s years of services and final salary. The fixed benefit to be provided varies across schemes.

Generally, DB schemes in the private sector provide for an annuity calculated as 1/60th of final salary multiplied by number of years of service, up to a maximum of 40 years’ service. This can usually be reduced by taking a lump sum on retirement.

Public sector DB schemes tend to provide for a lump sum of 3/80th‘s of final salary multiplied by number of years of service, and an annuity of 1/80th of final salary multiplied by number of years of service, both of which are subject to a maximum of 40 years’ service.

A DC scheme invests the contributions made to the scheme, including both employee and employer contributions where relevant, to provide a retirement benefit. The benefit is largely dependent on how the investments perform. The investments are managed by the pension trustees. Contributors generally have no influence over the investment plan.

‘A DC scheme invests the contributions made, including both employee and employer contributions where relevant, to provide a retirement benefit’