Final salary defined benefit schemes
Final salary defined benefit (DB) schemes are occupational pension schemes that provide a set level of pension at retirement, the amount of which normally depends on your service and your earnings at retirement or in the years immediately preceding retirement.
A final salary DB scheme might provide at retirement a pension of 1/60th of final earnings for each year an employee was in the scheme. If an employee retires after 40 years, that employee would receive a pension of 40/60ths (2/3rds) of their final earnings before retirement.
In a final salary DB scheme, it is not possible to know in advance how much the scheme is going to cost, for example, you don’t know what a member’s salary will be when they retire, or how long they are going to live. The benefits are fixed, and the contributions must be adjusted from time to time to make sure that the correct amount is being accumulated to provide for them.
It is usual in a DB scheme for the member’s contribution rate to be fixed (for example as a set percentage of salary) and for the employer rate to increase or reduce as needed, though in some DB schemes both employer and employee contribution rates change from time to time. However, it is important to know that DB scheme benefits are not guaranteed. If the scheme’s assets are not sufficient to pay the benefits, and the employer is not in a position to meet the shortfall, promised benefits may have to be reduced.