Wise Owl | Pensions overview

Pensions overview

Pension schemes can come in all shapes and sizes, but an important differentiator is whether a scheme is "Defined Benefit" (also sometimes loosely referred to as FInal Salary) or "Defined Contribution" (also referred to as Money Purchase), or a mixture of both.

Under a "Defined Benefit" scheme, the retirement pension earned by a member for each year of service is defined at the outset in the scheme rules using a specified formula and the ultimate level of pension is based on the member's earnings and service to retirement. Importantly, the pension entitlement is not linked to the investment return achieved on the pension scheme assets (and the risk of poor performance is borne by the sponsor).

Specifically, these are typically either Final Salary (pension based on final salary at retirement) or Career Average (pension based on average earnings over career), and the pension is paid for the member's life.

By contrast, under a "Defined Contribution" scheme, the sponsoring employer and the member pay a defined level of contributions into the scheme.

The ultimate level of retirement pension the member receives depends directly on the investment return achieved on those contributions within the scheme and on the cost of any investment products purchased by the member at retirement.

The member typically has the flexibility to choose the form of the pension income in retirement.

The Wise Owl Solutions pension scheme is a "Defined Benefit" scheme.

Due to the nature of "Defined Benefit" schemes, and in particular, the dependency on investment returns, actuarial valuations are undertaken periodically to assess whether the scheme is on track to provide the projected members' pension at retirement,and if not, the sponsoring employer and the trustees decide on corrective actions.