Definition
A Career Average Scheme (CAS) is a form of defined benefit pension scheme in which the pension is determined by the average salary during membership of the pension scheme. The annual pension on retirement is given by the formula:
where:
- \( \text{Salary}_i \) = Salary in year \( i \)
- \( n \) = Number of years of membership
- Accrual Rate = The percentage of the average salary accrued for each year of service
Historical Context
The Career Average Scheme was introduced as a more sustainable alternative to final salary schemes. Traditional final salary schemes determine the pension based on the salary at or near the end of a member’s career, which can be financially burdensome for employers due to salary inflation and career advancement. Career Average Schemes spread this risk by averaging earnings over the entire period of employment.
Types of Pension Schemes
- Final Salary Schemes: Pension is based on the salary at or near the end of the member’s career.
- Career Average Schemes: Pension is based on the average salary over the entire period of employment.
- Defined Contribution Schemes: Pension is based on contributions and investment performance.
Key Events
- Early 20th Century: Final salary schemes become popular.
- Late 20th Century: Career Average Schemes emerge as organizations seek more sustainable pension models.
- 21st Century: Increased adoption of Career Average Schemes due to regulatory changes and economic pressures.
Detailed Explanation
In a Career Average Scheme, pension benefits are calculated using the average salary earned over the member’s career, rather than their final salary. The formula to calculate the annual pension is as follows:
For example, if an employee has worked for 20 years with varying salaries, the average salary is taken, and the accrual rate (typically a small percentage) is applied to determine the annual pension benefit.
Charts and Diagrams
graph LR
A[Career Average Scheme]
B[Years of Service] --> C[Year 1 Salary]
B --> D[Year 2 Salary]
B --> E[Year 3 Salary]
B --> F[...]
B --> G[Year n Salary]
C --> H[Average Salary]
D --> H
E --> H
F --> H
G --> H
H --> I[Accrual Rate]
I --> J[Annual Pension]
Importance
Career Average Schemes are vital for:
- Providing a sustainable pension model for employers.
- Ensuring fair and equitable pension benefits for employees with varying career paths.
- Reducing financial risks associated with salary spikes at the end of a career.
Applicability
- Public Sector: Often used due to stable employment and defined benefit needs.
- Private Sector: Employed by companies looking to balance cost and employee benefits.
Examples
- A public school teacher with a steady career trajectory and consistent salary increases.
- A corporate employee with variable annual bonuses and promotions.
Considerations
- Inflation: The scheme should account for inflation to ensure the pension retains its value.
- Employment Gaps: How gaps in employment affect the average salary and pension benefit.
- Accrual Rate: The chosen accrual rate significantly impacts the final pension amount.
Related Terms
- Pension Scheme: A plan established to provide retirement income.
- Defined Benefit Pension: Provides a fixed, pre-determined benefit on retirement.
- Accrual Rate: The rate at which pension benefits accrue for each year of service.
Comparisons
- Career Average vs. Final Salary: Career Average Schemes are less impacted by end-of-career salary spikes.
- Career Average vs. Defined Contribution: Career Average offers more predictable benefits than the market-dependent Defined Contribution schemes.
Interesting Facts
- Career Average Schemes are often considered more equitable for employees with career breaks or fluctuating earnings.
- They are becoming more prevalent in response to increasing longevity and the need for pension sustainability.
Inspirational Stories
- Jane Doe: A teacher who, despite career breaks for family reasons, received a fair pension based on her career average salary.
Famous Quotes
“Retirement is not the end of the road. It is the beginning of the open highway.” – Anonymous
Proverbs and Clichés
- “Save for a rainy day.”
- “A penny saved is a penny earned.”
Expressions
- “Planning for the golden years.”
- “Ensuring a comfortable retirement.”
Jargon and Slang
- Accrual: The accumulation of pension benefits.
- Pension Pot: The total amount saved or accumulated for retirement.
FAQs
Q1: What is a Career Average Scheme? A: It is a pension scheme where the pension benefits are based on the average salary earned over the entire career, rather than the final salary.
Q2: How is the pension calculated in a Career Average Scheme? A: The pension is calculated by averaging the salaries over the years of service and applying an accrual rate to determine the annual pension.
Q3: Why are Career Average Schemes becoming popular? A: They are financially sustainable for employers and provide fair benefits for employees with varied career paths.
Q4: Do Career Average Schemes account for inflation? A: Many schemes include provisions to account for inflation to maintain the pension’s value.
Q5: How does an employment gap affect my Career Average Scheme pension? A: Employment gaps may lower the average salary, potentially reducing the pension amount, depending on the scheme’s specific rules.
References
- Pensions Advisory Service. “Types of Pension Schemes.” https://www.pensionsadvisoryservice.org.uk
- UK Government. “Public Service Pensions Act 2013.” https://www.legislation.gov.uk/ukpga/2013/25/contents/enacted
- OECD. “Pensions at a Glance 2021.” https://www.oecd.org/pensions/oecd-pensions-at-a-glance-19991363.htm
Summary
The Career Average Scheme provides a modern and sustainable approach to defined benefit pensions, offering equitable retirement benefits based on an individual’s entire career. With its balance of fairness and financial prudence, it has gained favor among both public and private sectors, ensuring retirees can enjoy their golden years with predictable and stable income.
