Glossary
Glossary
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Defined Contribution (DC): In a DC scheme, both the employer and employee contribute a regular percentage of the employee’s salary to an individual account specifically for the employee. The final benefit amount depends on the contributions made and the investment returns achieved.
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Defined Benefit (DB): In a DB scheme, employees are promised a specific level of retirement benefit, calculated through a formula typically based on salary and years of service. Employers bear the funding risk and are responsible for ensuring sufficient money is available to meet future obligations.
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Funded: In a funded pension scheme, contributions from employers and employees are invested on a regular basis separately to the company’s assets. The resulting fund is used to provide benefits upon retirement. This contrasts with ‘unfunded’ systems where no distinct pool of assets exists.
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Unfunded: In an unfunded scheme, there is no separate pool of assets. Retirement benefits are paid directly by the employer or through a government fund, often financed by the company’s current assets or by current contributions from active employees or other sources of revenue.