Cash balance schemes

Produced in partnership with Michael Collins of Gateley

Practice notes

Cash balance schemes

Produced in partnership with Michael Collins of Gateley

Practice notes

What is a cash balance scheme?

At its simplest level, a cash balance pension scheme is an arrangement by which the member builds up a guaranteed cash sum or amount during their Pensionable service, which will be made available for the provision of retirement benefits. When a member comes to retire this cash sum is then applied to buy an Annuity (or provide other retirement benefits) on whatever terms can be secured in the market at that time.

Such an arrangement can be seen as combining some of the features of a Defined benefit (DB) arrangement with some features of a Defined contribution (DC) arrangement. This is significant for how the risks inherent in any pension arrangement are allocated between the member and the sponsoring employer, as examined in this Note.

Benefit structures

There are different types of cash balance schemes but they fall broadly into two categories based upon how the cash sum at retirement is derived:

•
the first is where the cash sum is determined by reference to the member’s service and final salary at retirement

Michael Collins

Partner, Gateley

Michael advises employers and trustees of occupational pension schemes on all aspects of pensions law as well as dealing with pensions issues on corporate transactions. He also provides legal advice to executive pension providers and other pension professionals.

Michael is well placed to advise on all pensions-related issues, having advised clients ranging from owner-managed businesses in relation to their executive pensions to the multi-billion-pound pension funds of major international companies, including putting in place contingent assets (such as parent company guarantees or charges over property) in order to improve the security of pension scheme benefits and reduce levies payable to the Pension Protection Fund.

Jurisdiction(s):

United Kingdom

Key definition:

Pensionable service definition

What does Pensionable service mean?

The period of service in a defined benefit scheme that is used to calculate pension benefits or other benefits.

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