What is a pension deficit?

A pension scheme is in deficit if it doesn’t have enough money to pay the pensions of the people who are entitled to receive one. Only salary-related pension schemes can be in deficit. By salary-related schemes we mean final salary pensions, or career average pensions.

With a final salary pension, often known as a defined benefit pension, the amount you retire on is based on the salary you earn before you retire and with a career average pension, it’s based on your salary throughout your time in that pension scheme. You can find out more about how these pensions work in our guide What is a defined benefit pension?

With salary-related company pensions, it’s the responsibility of the pension scheme trustees – those who run the pension scheme, to make sure there is enough money in the pension scheme to pay everyone who is entitled to a pension.

The other main type of pension is either ‘defined contribution’ pensions or ‘money purchase’ pensions. With these types of pension, there’s no promise to pay you a certain amount when you retire. Instead, the amount you get at retirement will depend on how much money you and your employer pay in and how well the funds your money has been invested in perform. Learn more about this type of pension in our article What is a defined contribution pension?

Author: wpadmin

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