Which statement best describes a defined benefit - final salary scheme?

Which statement best describes a defined benefit - final salary scheme?

• A. Defined benefit - final salary
• B. Money purchase
• C. Defined contribution
• D. Defined benefit - career average

Answer: (A)

The key idea is that a defined benefit final salary scheme promises a retirement income calculated from a formula that uses your final pensionable salary and your years of service. The benefit is defined in advance, and the employer bears the investment and longevity risk. In practice, your pension is determined by how long you work for the scheme and what you earn toward the end of your career, rather than by how much is saved or how investment markets perform. A common way this is expressed is: pension equals a fixed accrual rate times years of service times final pensionable salary. This differs from defined contribution or money purchase plans, where the eventual retirement income depends on contributions plus investment returns. It also differs from a career-average DB plan, which uses average earnings over your whole career instead of final salary.

The key idea is that a defined benefit final salary scheme promises a retirement income calculated from a formula that uses your final pensionable salary and your years of service. The benefit is defined in advance, and the employer bears the investment and longevity risk. In practice, your pension is determined by how long you work for the scheme and what you earn toward the end of your career, rather than by how much is saved or how investment markets perform. A common way this is expressed is: pension equals a fixed accrual rate times years of service times final pensionable salary. This differs from defined contribution or money purchase plans, where the eventual retirement income depends on contributions plus investment returns. It also differs from a career-average DB plan, which uses average earnings over your whole career instead of final salary.