Cash Balance

Cash Balance schemes have some features found in defined benefit schemes and similarities to defined contribution schemes.

The benefit promised by the employer is a cash sum, which you use to buy a pension annuity when you retire.

The value of the cash sum is expressed as a proportion of your earnings for each year’s service. 

Typically a cash balance scheme might provide 20% of earnings for each year’s service.

So after 30 years you would have a lump sum of 30 X 20% of earnings which equals 6 years earnings.  This lump sum would then be used to buy an annuity (a pension).  The amount of this annuity will depend on a number of factors including life expectancy, and interest rates.

So a cash balance scheme is a hybrid between defined benefit and defined contribution, in that the investment risk is with the employer, but the annuity rate risk is with the employee.