What's the difference between DB & DC

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Under the Company’s proposal, after March 2018 Royal Mail Pension Plan (Plan) members would no longer build up future pension on a Defined Benefit basis. Instead, you would build up future benefits on a Defined Contribution basis.

This would be either in a new section of the Plan or in the Royal Mail Defined Contribution Plan.

Here, we look at the difference between Defined Benefit (DB) and Defined Contribution (DC) pension schemes.

DB and DC

The main difference between DB and DC pension schemes is how certain you can be about the amount of benefit you will get when you retire.

In a DB scheme, there is one pot of assets out of which all scheme members’ benefits are paid. Benefits are usually based on a formula using pensionable pay, pensionable service, and the rate at which you build up benefits. The amount you receive when you retire does not depend on investment returns. It is the Company that has the responsibility to ensure that the contributions paid into the scheme, along with investment returns, are sufficient to pay all the benefits.

In a DC scheme, each member has their own individual retirement account. Contributions from both the employee and the Company are paid into the retirement account. They are invested in order to grow. The amount you receive when you retire depends to a certain extent on the returns of these investments, as well as on charges levied. Benefits depend on the size of the retirement account when you retire as well as the cost of options chosen at retirement. There is no guaranteed amount.