Occupational pension schemes are the most common type of employer-funded pension in Ireland. If you are in a pension plan to which your employer contributes, there is a good chance that you are a member of an occupational pension scheme. If not, you are likely to be a member of a Group PRSA.
There are two main types of occupational pension scheme: Defined Benefit and Defined Contribution.
Defined Benefit Pension Schemes
Under a defined benefit pension scheme, you have a commitment from the scheme that you will receive an income in retirement, usually calculated as a proportion of your salary. Typically, the higher your salary and the longer your years of service with the company, the higher your pension will be.
Under a typical arrangement, for every year of pensionable service at the company, you will receive an income in retirement of 1/60th of your final salary, inclusive of state pension. Different schemes will be based on a different percentage of your final salary, for example 1/80th or 1/100th, while others are based on average rather than final salary.
Defined Contribution Pension Schemes
Under a defined contribution scheme, you accumulate your own Retirement Account, and you make the investment decisions relating to that Retirement Account yourself. At retirement, your accumulated Retirement Account is normally used to provide you with a tax free lump sum and an income for life. Under a defined contribution scheme, the level of benefit you receive will be determined largely by the level of contributions made by your employer and/or yourself and the investment performance of your chosen investment option.
Paying for your pension
Different occupational pension schemes have different contribution arrangements.
In most defined contribution arrangements, the employer and the employee each agree to contribute a percentage of the employee’s salary to the pension. For example, the scheme rules may stipulate that the employer will contribute an amount equivalent to 5% of the employee’s salary to the pension in return for the employee contributing 5% of salary.
In defined benefit arrangements, the employee will usually be required to contribute a percentage of salary to the pension. The employer’s contribution will fluctuate depending on the amount required to maintain the scheme’s ability to honour its obligations.
In some schemes all contributions are made by the employer and none by the employee. This type of arrangement is rare nowadays, but some pension schemes still operate in this way.