In a defined benefit scheme the promise is the benefit formula, not a personal investment account balance. The sponsor (often an employer or public body) carries the investment and longevity risk of funding that promise. Actuaries test whether contributions and assets look sufficient.
Key takeaways
- You can project a rough pension from the formula if you know salary and service.
- Funding shortfalls are the sponsor’s problem first, but weak sponsors create member risk.
- These schemes have become less common in many private sectors because costs are hard to predict.
- Indexation, spouse benefits and early retirement factors can change the real value a lot.