Career Average Revalued Earnings Schemes (CARE)

CARE Schemes are a type of defined benefit scheme. They are based on average salaries throughout the member’s service rather than final salary at retirement.

CARE schemes used to be quite rare in the UK but are growing in popularity. Tesco, Sainsbury and Co-op Group all operate CARE schemes.

In a CARE scheme, a defined level of pension is built up each year – for example, 1/60ths – based on the member’s earnings in that year.

The pension built up in that year is then revalued, year-by-year, to protect it from the inflation. This process of building up annual pension and revaluation continues up to retirement.

There are several possible methods of revaluation.

The pension built up each year can be revalued in line with:
• Price inflation (Retail Prices Index) .
• Price inflation capped at a set rate of inflation; for example, 5%.
• Average earnings; historically these have risen faster than prices.
• A company’s own history of pay rises.

All of the recently launched career average salary schemes use the less costly method of linking revaluation to price inflation.

CARE schemes have the benefit for employers of a less open-ended cost commitment than final salary schemes. This is because any high salary increase in one year would not result in a high increase in total pension costs.

The cost advantage to the employer is greatest if revaluation is in line with the Retail Price Index (RPI) rather than average earnings.

Also, if the revaluation is RPI capped at a set figure, then in times of high inflation the member and not the employer bears the risk.

Employers can also have discretion to award  bonus pension. 

Overall, CARE schemes may provide better pensions for those who are likely to have peak earnings in their middle years.

They are also suitable for those who wish to move from full-time to part-time or lower paid work at the end of their working life.

However, final salary pension schemes will be better than CARE for those who have promotions and earn most in the years just before retirement.

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© 2003 (USDAW) Union of Shop, Distributive and Allied Workers
This page: http://www.usdaw.org.uk/pensions/resources/1149511973_11121.html
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