Defined benefits pensions are not guaranteed. If the scheme’s assets are not sufficient to pay the benefits, and the employer is not in a position to meet the shortfall, promised benefits may have to be reduced.
What isn’t defined in a defined benefit scheme is how much it will cost your employer to provide you with that benefit in retirement.
With a defined benefit scheme, your employer holds all of the risk associated with your retirement benefits.
Where there is a difference between what your employer has promised you and what’s available in the pension fund, your employer has a liability to make up for the difference.
This is why defined benefit schemes are becoming increasingly uncommon, in favour of less risky defined contribution schemes, which shift the pension risk onto the employee
If your employer becomes unable to make up the difference, this can become a major issue for pensioners.
Take a look at the Waterford Crystal Case to see the risks associated with DB schemes in practice –