Accrual of benefits
The rules of a defined benefit scheme will define the benefits that it will provide to a member on retirement or on death. The benefits provided will be based on the following three factors:
- Pensionable service – The definition of pensionable service is laid out in the scheme rules and is usually the employee’s period of membership of the scheme. It may not start until a waiting period has been completed.
- Pensionable remuneration – The rules also lay out the definition of ‘salary’ that is used when determining benefits. Remuneration falling within this definition is known as pensionable remuneration.
For example, the rules may define pensionable remuneration as the member’s basic salary at the point of retirement or death. Sometimes the rules allow other forms of earnings to be included, e.g. bonuses or overtime may be averaged over, say, three years and added to the member’s basic salary.
- Accrual rate – Again, the rules define the rate at which the scheme benefits accrue for each year of pensionable service, e.g. 1/60th of pensionable remuneration for each year of pensionable
Question - Use Your Note Taker To Jot Down Ideas / Calculations
Four members of different defined benefit pension schemes are approaching retirement. Who will have the largest pre-commutation pension?
Select one:
a) David, who has 17 years’ service in a 1/60th scheme and a final pensionable salary of £48,000
b) Alan, who has 21 years’ service in a 1/80th scheme and a final pensionable salary of £51,000.
c) Colin, who has 18 years’ service in a 1/80th scheme and a final pensionable salary of £59,000.
d) Brian, who has 21 years’ service in a 1/60th scheme and a final pensionable salary of £39,000.
D)
Chapter reference 4B4
While others have a higher salary, Brian has the best accrual rate just like David. In this sort of question you can start to identify the wrong answers using knowledge of the calculation required and then just work out the largest pension.