For employees, one of the main attractions of a defined benefit scheme is that they know what their pension will be.

This is because the scheme will state it as a proportion of their final pensionable remuneration.

The contribution made to the scheme by the employer (and possibly the employee) is calculated as the cost of providing this defined level of benefit.

Employer’s contribution

This contribution must meet the cost of providing DB benefits on retirement and death. The scheme actuary calculates contribution required.

The cost can depend on factors such as

Level of benefits in the future

Investment returns from the underlying fund

Annuity rates when member’s decide to take benefits

Cost of providing benefits to members who leave the scheme pre NRA

Number of members who die pre NRA

Profile of scheme membership, eg age and marital status.

Employee’s contribution

Employee contributions; this is usually expressed as a percentage of the client’s salary

It is set at a rate that usually remains constant

Employer contribution is paid gross and allowable as an expense, whereas employee contributions are either net pay or relief at source method