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Occupational Pension Schemes


Here you will find information on all aspects of occupational pension schemes.

Occupational pension schemes are pension arrangements that are set up by employers to provide income in retirement for their employees. Although the employer is responsible for sponsoring the scheme, it is actually run by a board of trustees - with the exception of most public sector schemes. It is this board of trustees that is responsible for ensuring payment of benefits.

There are two different types of occupational pension scheme - money purchase and final salary. The following is a simple explanation of how each of them works:

Final Salary

Final salary schemes are sometimes known as defined benefit or salary related schemes. Members contribute to the scheme with the promise of a certain level of pension. The amount of pension payable from such a scheme is dependent upon:

  • the length of time served in the scheme (known as pensionable service);
  • earnings prior to retirement (known as final pensionable salary); and
  • the scheme's 'accrual rate'. The accrual rate is the proportion of salary that is received for each year of service. So, if the scheme has an accrual rate of 60, the member will receive 1/60ths of his final pensionable salary for each year of service completed.

For example: pensionable service x pensionable salary
                                                      60
Money Purchase

Money purchase schemes are sometimes referred to as defined contribution schemes. Employers and employees contribute to the scheme, where the money is invested, and build up, for each scheme member, a 'pot of money'. The amount of pension payable from this scheme is dependent upon:

  • the amount of money paid into the scheme (by the member and the employer);
  • how well the investment funds perform; and
  • the 'annuity rate' at the date of retirement. An annuity rate is the factor used to convert the 'pot of money' into a pension.

 

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