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Private pensions

Career average defined benefit schemes

Career average defined benefit (DB) schemes are a variation of the traditional defined benefit design. The level of pension at retirement is based not on the earnings close to retirement, but rather on the average earnings throughout the member’s entire career. These earnings may be revalued up to the point of retirement in line with some index, for instance the Consumer Price Index (CPI). Such schemes are known as Career Average Revalued Earnings (CARE) schemes.

Example

A career average DB scheme might provide at retirement a pension of 1/60th of career average revalued earnings for each year an employee was in the scheme. If an employee retires after 40 years, that employee would receive a pension of 40/60ths (2/3rds) of their average revalued earnings over their career.

An employee whose earnings grow by more than the revaluation rate (for example through promotional increases) will get lower retirement benefits from a career average scheme than from a comparable final salary scheme.

In a career average DB scheme, it is not possible to know in advance how much the scheme is going to cost. The benefits are fixed, and the contributions must be adjusted from time to time to make sure that the correct amount is being accumulated to provide for them.

It is usual in a DB scheme for the member's contribution rate to be fixed (for example as a set percentage of salary) and for the employer rate to increase or reduce as needed, though in some DB schemes both employer and employee contribution rates change from time to time. However, it is important to know that DB scheme benefits are not guaranteed. If the scheme's assets are not sufficient to pay the benefits, and the employer is not in a position to meet the shortfall, promised benefits may have to be reduced.