Funding an Occupational Scheme

Funding an Occupational Scheme


A funded occupational pension scheme must build up sufficient funds either on a (more common) money-purchase basis or on a final salary basis to provide future pensions for members.

Money-Purchase

In the case of money-purchase, fixed amounts or percentages of salary are paid by the employer on behalf of individual scheme members and those sums, as well as investment income and capital gains there on, provide retirement benefits which will eventually determine the size of the resulting fund. The prime advantages for an employer of such an approach is certainty of costs.

Final Salary

With a final salary scheme, (generally applicable only to employers with a large work force) the employee receives a pension based on his final salary on retirement. Actuarial assumptions must be made in order to determine the size of the required fund. Whilst the employee knows his precise entitlement, such a scheme may well be expensive for the employer.

It should be noted that employers are moving to close their final salary pension schemes in advance of government plans to raise National Insurance costs:

http://www.bbc.co.uk/news/uk-20996912

 

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