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Published online by Cambridge University Press: 05 July 2011
The following chapter addresses the meaning of good governance for defined contribution (DC) schemes. The issues arising are somewhat different from those for defined benefit (DB) schemes and this note is intended to explain the difference in context.
DC is different from DB
There is a fundamental difference in who carries the risk between a DC scheme, in which the benefits are determined by the contributions paid, the investment return achieved and the terms on which the capital accumulated at the point of retirement is converted into a series of future payments by purchase of an annuity, and a DB scheme, where the benefits are determined by the rules of the scheme in terms of salary and years of service. In each case, the member contributions are normally fixed as a percentage of pensionable salary. The uncertainty of future investment returns thus represents a risk to the member in a DC scheme, whereas in a DB scheme it creates uncertainty in the amount of future contribution and funding requirements, and hence represents a risk to the employer.
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