DEFINED CONTRIBUTION

In a defined contribution scheme, the amount which the employee and employer contributes to the scheme is defined. This accumulates in a specific account for each member. The benefit which will be provided to the member is not defined or guaranteed in advance, but will depend on:

• how much has been paid in
• the investment return on the funds during the period up to retirement and
• the cost of buying a pension at the time it is required

Under this approach, the cost to the employer and members is known, but the level of benefit is not known in advance. Members may have a choice over how to invest their account from a range of Investment Options.

Additionally, defined contributions schemes generally provide more flexibility in benefit delivery for members than defined benefit schemes. The employee can often choose how to use the account for the purposes of providing an individual pension, a pension benefit for dependants, cash and annual increases to the pension once in payment.