The Career Average Revalued Earnings Scheme, devised and introduced by The Pensions Trust, is designed as defined benefit scheme, where 1/80th of pay in each individual year is earned as a pension benefit, payable at age 65 for both men and women. This level of pension benefit is revalued each year to take account of inflation as measured by the retail price index.
If salary inflation averages at 2 percentage points more than the RPI, the Pensions Trust reckons the replacement rate works out at 1/70th of final salary.
The employer contribution rate is pitched at 10% of gross earnings, assuming an average weighted age of 45 in the scheme, but as the scheme is contracted out, the cost is less National Insurance. While the assumption is that this will not need to increase, the trust says this rate can be amended “in the event of any unforeseen or exceptional circumstances”.
A member’s contribution is calculated by dividing current age by 10, so at 22 it is 2.2% of that year’s earnings and at age 46, 4.6%; the rate increase each year by 0.1% of current earnings to a maximum of 6.5%.
CARE is designed to lead to over-funding, assuming an annual return of 1.5% in real terms on assets. Surpluses are likely to occur other than in very bad conditions.
The scheme actuary every three years says what prudent funding level is needed, and if there is a surplus, distributes this to active and deferred members, payable as an additional bonus at age 65. This surplus also acts as a cushion to be used should investment returns not be as predicted rather than increase the employers’ contribution.
On death before retirement a lump sum is payable of three times the previous year’s earnings, plus a dependants pension; on death in retirement a dependant’s or partners pension is payable.