With a money purchase or defined contributions pension scheme the employer and employee make contributions to an investment fund to create a ‘pot of money’. The latter will fund the employee's pension on retirement and is usually used to purchase a pension from a financial services company. Money purchase schemes differ from defined benefit pensions in that the financial risk associated with the investment of pension contributions is transferred to the employee. Money purchase pension schemes are becoming more common because they carry a series of advantages for employers. It is possible to have a mixed benefit scheme, which effectively combines final salary and money purchase principles. [See final salary pension scheme and occupational pension.]
Subjects: Human Resource Management.