Final-salary pension schemes are sometimes called ‘gold-plated’. Why?
Mike Freer replies:
Basically, there are two main types of pension scheme, although with several different names for each it can seem like there are many more.
They are:
1. Defined Benefit, also called ‘DB’, final salary or CARE (career average revalued earnings).
2. Defined Contribution, also called ‘DC’ or money purchase.
DB schemes are sometimes called ‘gold-plated’ because, as long as they are adequately funded, they will provide a guaranteed level of retirement income for the rest of your life. This income may also increase, depending on the rules of the particular scheme.
On the other hand, DC schemes operate a bit like a bank account. At retirement you use whatever money is in your ‘pot’ at retirement to generate an income. How much income you get depends on the size of the pot. This is affected by both the contributions paid and the investment return achieved. Therefore, the level of benefits from a DC scheme isn’t known until close to retirement; the risk of poor investment returns falls on the individual, whereas for a DB scheme your employer would pay extra contributions to offset any poor investment returns. The greater certainty
of a DB pension is one reason why it may be considered ‘gold-plated’.
