Company pension schemes generally take one of two approaches. They are either a defined contribution or a defined benefit scheme.
A Defined Benefit (DB) scheme sets out a figure at the outset which the employee will receive in retirement. This figure is calculated based on the number of years worked and the salary of the employee.
Unless an employee’s salary changes or the number of years worked changes then the defined benefit will not change.
The employee can rely on receiving this amount in retirement.
A Defined Contribution (DC) on the other hand is an accumulation of funds that make up a person’s pension pot.
Each salary period, an employee pays an agreed portion of their salary to the pension scheme. This is generally (but not always) matched by an employer’s contribution.
These two payments (employee and employer) are combined and invested in a fund to build retirement benefits for the employee. The value of the eventual retirement fund can change, depending on the performance of the fund it is invested in.
A person with a DC pension will be updated annually on how their fund is performing and the predicted value of their pension at retirement.