Occupational pension schemes are pension arrangements that are set up by employers to provide income in retirement for their employees. Although the employer is responsible for sponsoring the scheme, it is actually run by a board of trustees (with the exception of most public sector schemes). It is this board of trustees that is responsible for ensuring payment of benefits.

There are two different types of occupational pension scheme - defined contribution (more commonly known as money purchase) and defined benefit (also known as final salary and career average revalued earnings (CARE)).

Final Salary Schemes

Final salary schemes are sometimes known as defined benefit or salary related schemes. Members contribute to the scheme with the promise of a certain level of pension. The amount of pension payable from such a scheme is dependent upon:

• the length of time served in the scheme (known as pensionable service);

• earnings prior to retirement (known as final pensionable salary); and

• the scheme's 'accrual rate'. The accrual rate is the proportion of salary that is received for each year of service. So, if the scheme has an accrual rate of 60, the member will receive 1/60ths of his final pensionable salary for each year of service completed.

Career Average Revalued Earnings (CARE) Scheme - a career average scheme is a type of final salary arrangement.  They have recently become more popular as employers attempt to control funding costs, but continue to deliver a defined benefit scheme.

A career average scheme matches each year's benefit accrual to earnings in each year rather than the final years' earnings. The earnings figure will be uprated in line with prices rather than the actual increase in earnings.

For example, if the scheme provides a pension calculated as 1/60 of pay for each year of service and the member retires in 2010 with 30 years' service, then to calculate pension, each year's pay will be uprated with inflation and then aggregated. It will then be divided by 30 to provide the "average" pay, which in the example would be multiplied by 30/60 to arrive at the pension.

Money Purchase

Money purchase schemes are sometimes referred to as defined contribution schemes. Employers and employees contribute to the scheme, where the money is invested, and build up, for each scheme member, a 'pot of money'. The amount of pension payable from this scheme is dependent upon:

• the amount of money paid into the scheme (by the member and the employer);

• how well the investment funds perform; and

• the 'annuity rate' at the date of retirement. An annuity rate is the factor used to convert the 'pot of money' into a pension.