Defined benefit (DB) pension schemes have until relatively recently been the dominant plan for retirees in the UK. In a DB scheme, employers pay retired employees a fixed amount based on how long the employee worked for the company and the final level of their salaries (hence, they are also called ‘final salary’ schemes).
DB schemes used to be very popular because they encouraged employee loyalty. More recently, however, as a result of legislative change, falling bond yields and increasing longevity, many DB schemes have found that their assets no longer meet their future liabilities, resulting in a funding gap or pension deficit. Calculating the liabilities of a scheme is inherently difficult as they involve a number of assumptions about the future. Nevertheless, the scale of the pension deficit problem in DB schemes has grown considerably in recent years, with many suggesting that our pension system is now approaching a full-blown crisis.