- Helping members of occupational pension schemes to better understand their benefits.

21st November 2019
:: Scheme Member | Types of Pension Scheme | What is a defined benefit scheme? | Pensioner members of a DB scheme

What is a defined benefit scheme? - Pensioner Members
This Factsheet is written for people who are pensioner members of a defined benefit scheme 
There are many types of pension scheme offered by employers for their employees.
This Factsheet looks at defined benefit schemes – often called ‘salary-related’ pension schemes which have for years, been the most important part of many employees pension benefits.
To understand what a defined benefit scheme is, you ought to know the very basics about employers’ pension schemes. See our Factsheets What is a pension scheme? and Types of employer sponsored pension schemes.
What is an occupational pension scheme?
An occupational pension scheme is a pension scheme set up by an employer to provide benefits for one or more employees. An occupational pension scheme can be either a defined benefit scheme or a money purchase scheme. Some employers offer both types and some have a combination of both types within the same scheme (a hybrid scheme).
What is a defined benefit scheme?
Most defined benefit schemes provide benefits based upon 4 key elements: 
  • the length of the pensionable service you were credited with as being an active member of the scheme
  • your pensionable salary
  • the formula or rate of ‘accrual’ which used service and salary to work out your pension
  • the circumstances under which benefits were taken from the scheme (retirement, early payment, early leaver, ill-health etc).
Your pension scheme will have used a formula, to calculate your pension benefits using these elements. The formula (and the definitions for each part of it) will be set out in the Scheme Rules.
The two most common forms of defined benefit scheme are: 
  • ‘final salary’ schemes where your pension is based upon your ‘final pensionable salary’ which is normally worked out over the years immediately before you ceased to be an active member of the pension scheme
  • ‘career average revalued earnings schemes (CARE scheme) where your pension is based upon your ‘average pensionable earnings’ throughout the whole of the time you were an active scheme member.
Because both types of scheme use your pensionable salary as one part of the formula in order to calculate your pension, they are both commonly referred to as ‘salary related’ schemes, but there is a significant difference between the two.
Example of a ‘final salary’ formula:
length of pensionable service     x   final pensionable salary
          accrual rate
A ‘final salary’ type defined benefit scheme would use your pensionable earnings worked out over the years immediately before you ceased to be an active member of the pension scheme. Different schemes use different definitions, so it is the definition of your ‘final pensionable salary (or ‘final pensionable earnings’) that is important in this type of scheme. A common example of ‘final pensionable salary’ would be your pensionable earnings in your last year as an active member of the scheme.
Example of a ‘CARE scheme’ formula:
length of pensionable service     x   average pensionable salary
          accrual rate
A CARE scheme uses your average pensionable earnings over the lifetime of your active scheme membership. It is therefore, the definition of your ‘pensionable earnings’ that is important in this type of scheme. Usually, the pensionable earnings used are increased (called inflation adjustment) to allow for inflation between the date they were received and the date you ceased to be an active member. The ‘inflation adjustment’ could be structured in many ways, but would be based upon one of the Prices Inflation Indexes (such as RPI or CPI) or in a generous scheme, on Average Earnings increases.
A defined benefit scheme provides benefits that are based upon a set of rules which relate to particular members of a particular scheme, at a specific time. The key feature of defined benefit schemes, is that a specific amount of pension benefit will be paid to the members in specific circumstances.
It is not true that defined benefit schemes provide a guaranteed retirement pension. The pension benefit paid will depend upon many factors, with the most important being the scheme’s ability to pay benefits to members as they fall due. If the employer’s business fails, it is likely that benefits will be reduced for some, if not all members (although Public Sector schemes are different in this respect).
All members in the scheme will have their benefits calculated in a similar way (though not necessarily exactly the same way).
A defined benefit scheme has special features in that the scheme promises to provide benefits for its members. The assets required to pay for these benefits are held in a separate pool administered by a set of Trustees. The sponsoring employer tops up these assets out of company funds and from contributions deducted from the wages of any current active members.
While this situation exists, pensioners’ benefits are a first charge on the schemes assets. That charge would normally be deducted from the employer’s monthly contributions to the scheme. Alternatively, in the event of the pensioner benefit being paid by an insurance company, the scheme will have paid an amount to the insurer to cover all future payments.
How secure are my benefits?
In a private sector defined benefit scheme, your benefits are only as secure as the funds which have been set aside to pay for the benefits for all members including those who have yet to retire, and the employer’s willingness and ability to continue to support the scheme. Even if your benefits had been secured by a payment to an insurance company, the Trustees can stop or reduce the payment in extreme situations.
With the introduction of the Pension Protection Fund you may be entitled to ‘compensation’ if the sponsoring employer goes into receivership and your scheme meets the qualifying criteria set to allow compensation to be paid to scheme members. This would provide a limited promise that part of your pension would continue but could still mean a reduction in your benefits.
In a public sector defined benefit scheme, such as those for nurses, teachers, local government and civil servants, benefits are generally regarded as ‘safe as houses’. Some of these schemes, such as the Local Government Pension Schemes, are ‘funded’ in the same way as private sector schemes but employer contributions come from local taxation such as Council, Local Business taxation, and through Central Government settlements which come from the taxpayer.
These particular schemes would not qualify for the Pension Protection Fund, as it would be expected that the Treasury would one way or another, bail out any such scheme that suffered serious problems. This is clearly a highly political area.
For more information see our Module, How secure is my pension?
What rights do I have as a member to ensure the scheme is run properly?
Any member can seek election to become a Trustee of their pension scheme, where there is a Board of Trustees. A Trustee is responsible for ensuring the scheme operates according to all the scheme rules.
If you are unhappy about any aspect of the scheme contact the Trustees and if they do not satisfy you having formally pursued the Internal Dispute Resolution Procedure, you can contact The Pensions Ombudsman or The Pensions Regulator depending on your problem. Also, see our list of Useful Contacts.
Summary & Key Points
When making enquiries about your pension benefit it is very important that you make it clear that you are a pensioner member of the scheme rather than an active member or a preserved member. Active, preserved and pensioner are different classes of membership of a pension scheme and any definitions and paragraphs contained within your Scheme Rules or scheme literature relating to any benefit may differ considerably between these categories.
For each pension benefit you should know: 
  • What pension benefits are provided by your pension scheme on your death after retirement? Spouse’s, civil partner’s, dependents’ pensions, lump sum?
  • If spouse’s, civil partner’s pensions are payable, will these cease on remarriage?
  • How secure is your pension? Would you be eligible for the Pension Protection Fund?
  • Keep informed. Your scheme may modify benefits and Rules. Legislation may change. Your circumstances may alter.
  • Rules differ from scheme to scheme and are wide and varied in content. Don’t assume that what applies to one of your pension schemes will necessarily apply to others that you may have.
  • HMRC impose rules which registered pension schemes must conform to.
People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences.
This Factsheet forms part of our Module Types of Pension Scheme and should be read alongside the other Factsheets and Quicknotes in the series.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
What is a defined benefit scheme v3.0 - Pensioner
Last updated 21/12/2006
View our Glossary for definitions of the terms used in our Factsheets

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What is a Defined Benefit Scheme - Pensioner Members
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