The accrual rate is the fraction of final salary for each year
of service a scheme may provide in the form of a pension.
Many defined benefit schemes work to a target of providing a
maximum pension of 2/3rd of final salary for someone who works for
40 years for the same employer. In these circumstances the scheme
accrual rate is likely to be set at the fraction 1/60th. This means
that for each year of service an employee is entitled to an
additional 1/60th of their salary as a pension.
Example1
Jack has a salary of £30,000 and has worked for 26 years with the same JJ &K Ltd he will have entitlement to 26/60 x 30,000 or £13,000.
Laura on the same salary with 40 years to count would be entitled to 40/60 x 30,000 or £20,000 equivalent to 2/3 of final salary.
However some schemes will provide a more generous accrual rate,
for example, 1/30th which allows a maximum pension of 2/3rd of
final remuneration to be obtained after 20 years service.
Example 2
John has worked for KGB Ltd since 1976 and wishes to take his retirement benefits on 1 September 2006. His accrual rate is 1/30th and his best years salary in the past 5 years is £27,000 without any bonuses.
The first point to consider is that even though John has worked for ABC Ltd for 30 years, his pension scheme may only count 20 years towards his service. In which case John’s benefit may look like this:
20/30 x £27,000 = £18,000 per annum
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