Some employers offer these schemes, also known as ’salary-related pension schemes’. When someone retires from the scheme, it pays them a pension where the benefit is based on rules set out by the scheme.

How defined benefit schemes work

Defined benefit schemes usually provide a pension income based on:

The number of years someone has been a member of the scheme – known as ‘pensionable service’

Pensionable earnings – this could be salary at retirement (known as ‘final salary’), salary averaged over a career (‘career average’), or some other formula

The proportion of those earnings received as a pension for each year of membership – this is called the ‘accrual rate’, and some commonly used rates are 1/60th or 1/80th of pensionable earnings for each year of pensionable service

These schemes are run by trustees who look after the interests of the scheme’s members. The employer contributes to the scheme and is responsible for ensuring there is enough money at the time the scheme member retires to pay their pension.