SP4 - DC scheme contribution

Hi Bharti

Yes, when people talk about an age-related contribution rate, they are saying that the contribution rate (as a percentage of the member's pensionable salary) increases with age. So, for example, 10% for members age 20-30, 15% for those age 31-40, 20% for those age 41-50 etc.

Employers may wish to use this sort of scale of contributions because, for example, it mimics the increasing cost of accrual in a final salary scheme (where, for example, the cost of providing a pension of 100ths of final salary for a year of service may be 10% for a member age 25, 15% for a member age 35 etc). Also, sometimes it is suggested that older workers are more concerned about pensions than younger workers, and it makes sense to target an employer's contributions towards those who value them most.

Other scales are possible Eg:
- service-related - where the contribution rate (as a percentage of the member's pensionable salary) increases as the member works for the employer for longer - rewarding loyalty
- level contributions - where the contribution rate (as a percentage of the member's pensionable salary) doesn't change.

Contributions to an employer's pension scheme are often expressed as a percentage of member's salary.

The term 'flat-rate' generally means "the same amount". So with a flat-rate pension, everyone receives the same amount in £s terms (assuming they meet any eligibility criteria). State benefits are sometimes flat-rate.

Similarly, under flat-rate contributions, everyone pays the same amount in £s terms. This may be easy to administer and can seem to be fair (everyone pays the same). But if those contributions are high, they may be unaffordable for someone on a low income and very easily affordable for someone on a high income, which may seem unfair. And if individuals pay these contributions to the State, they can seem like a regressive tax, ie those on low incomes have to pay a higher proportion of their income than those on high incomes

Hope that helps
Gresham