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Document Is the NHS Pension Scheme a defined benefit arrangement or defined contribution arrangement?

The NHS Pension Scheme is a classed as a defined benefit arrangement or plan. Defined benefits include any added years or additional pension contracts, but not Money Purchase AVC’s (MP AVC’s) or freestanding AVC’s.

In a defined benefit pension arrangement or plan an employer or scheme promises a specified monthly benefit (or pension) on retirement that is predetermined by a formula based on the employee's earnings history, years of service and age, rather than depending on investment returns. It is defined in the sense that the formula for computing the members benefit is known in advance. The most common type of formula used is based on the employee’s terminal earnings (final salary). Under this formula, benefits are based on a percentage of average earnings during a specified number of years at the end of a worker’s career.

In the private sector, defined benefit plans are typically funded exclusively by employer contributions. For very small companies with one owner and a handful of younger employees, the business owner generally receives a high percentage of the benefits. In the public sector, defined benefit plans often require employee contributions. The employer or scheme bears the investment risk.

In a defined contribution arrangement the "cost" of a defined contribution plan is readily calculated, but the benefit (or pension) from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the contribution is known or defined but the benefit is unknown (until calculated).

In a defined contribution plan, fixed contributions are paid into an individual account by employers and employees. The contributions are then invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. The future benefits on retirement are not guaranteed and any risks in the investment are assumed by the member not by the employer/scheme or sponsor.

Any Money Purchase AVC (MP AVC) or Freestanding AVC’s are classed as a defined contribution arrangement.
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