Career average scheme

A Career Average Scheme (CARE) is a type of defined benefit pension scheme in which the pension payout is calculated based on the average salary earned throughout the employee’s career, rather than their final salary.
Written by
Reviewed by
Updated on Jun 4, 2024
Reading time 3 minutes

3 Key Takeaways

Copy link to section
  • Career average schemes base pension benefits on the average salary earned throughout a career, not the final salary.
  • They often revalue past earnings to account for inflation, ensuring benefits keep pace with the cost of living.
  • This type of scheme provides more predictable pension outcomes for both employers and employees compared to final salary schemes.

What is a Career Average Scheme?

Copy link to section

A Career Average Scheme is a type of defined benefit pension plan where an individual’s pension benefits are calculated based on their average earnings over their entire career, as opposed to their final salary. This average is often revalued each year to account for inflation, hence the term “Career Average Revalued Earnings” (CARE).

Importance of Career Average Schemes

Copy link to section
  • Predictability: CARE schemes offer more predictable pension outcomes for both employers and employees. The cost of providing pensions is spread out over the employee’s career, making it easier for employers to manage. Employees also have a clearer idea of what their pension will be based on their earnings history.
  • Fairness: CARE schemes are considered fairer to those who experience significant career progression as their pension benefits are not solely dependent on their final salary, which may not accurately reflect their overall earnings.
  • Sustainability: In times of economic uncertainty, CARE schemes can be more sustainable for employers as they are less susceptible to fluctuations in final salaries.

How Career Average Schemes Work

Copy link to section

Each year, a portion of the employee’s salary is set aside to build their pension pot. This amount is typically a fraction of their annual salary, such as 1/57th or 1/80th. These contributions are then revalued annually in line with inflation or a predetermined index, ensuring the pension keeps pace with the cost of living.

When the employee retires, their total pension is calculated by adding up all the revalued annual contributions.

Examples of Career Average Schemes

Copy link to section
  • Teachers’ Pension Scheme (England and Wales): This scheme, introduced in 2015, is a CARE scheme where teachers accrue 1/57th of their pensionable earnings each year.
  • Local Government Pension Scheme (LGPS): The LGPS also transitioned to a CARE scheme for new members from 2014, offering benefits based on career average earnings.
  • NHS Pension Scheme: Certain sections of the NHS Pension Scheme are CARE schemes, providing benefits based on average career earnings.

Real-World Application

Copy link to section

Career average schemes are becoming increasingly popular in the UK as they offer a more sustainable and predictable alternative to final salary schemes. They provide a fair and transparent way to calculate pension benefits, ensuring that both employers and employees have a clear understanding of how pensions are accrued and paid out.pen_sparktunesharemore_vert


Sources & references

Arti

Arti

AI Financial Assistant

  • Finance
  • Investing
  • Trading
  • Stock Market
  • Cryptocurrency
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...