Defined benefit pension schemes are also known as ‘final salary’ or ‘salary-related’ pensions. They promise to provide individuals with a certain amount each year upon retirement. How much is paid doesn’t depend on investments.
The amount you’ll get depends on your salary and on how long you’ve worked for your employer. The pension scheme administrator can give you more details.
Defined benefit pension schemes are usually based on an individual's final earnings at or near retirement - or when they leave the company if this is before retirement - and how long they were in the scheme. These are also known as salary-related or defined benefit schemes. See how to choose the right pension scheme.
Defined benefit pension schemes generally operate through a trust that receives contributions from the employer and employees and pays out members' benefits. The trust's objectives are set out in the trust deed, and the day-to-day decisions are made by the trustees.
There are a number of legal obligations governing the relationship between the employee, the trust and the employer:
- the employer is bound, like the employee, by the legal obligations of the contract of employment - for example, the payment of pension contributions
- all trustees, including those nominated by the employer, must act in the interests of all the scheme's beneficiaries - which includes scheme members, but may in some rare situations also include the sponsoring employer rather than those of the company
- the employer has a duty to notify the Pensions Regulator if there is any reason to think that there are any problems or wrongdoings occurring in the scheme and that the wrongdoing is important to the Pensions Regulator
- the employer is responsible for ensuring that any employee contributions deducted from pay reach the pension scheme within 19 days of the end of the month in which they were deducted, and that any employer contribution arrives when it is due
- the employer must ensure that the assets of the pension fund are kept totally separate from those of the business
- the employer must ensure that employees are informed and consulted on developments that affect the pension fund
- trustees must be assisted in the performance of their duties - employee trustees must be given paid time off to undertake those duties and any necessary training
The Pensions Regulator provides a free, online learning programme called the Trustee toolkit.
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