Defined Benefit Pension: Your 2025 Quick Guide

If you’re handling a company’s treasury, you’ve probably heard the term “defined benefit pension” (DB). It’s the classic pension plan where the employer promises a set payout based on salary and years of service. In 2025 the rules are the same, but the landscape around funding and risk has shifted. Let’s break down what matters for you today.

How Defined Benefit Pensions Work

A DB pension calculates retirement income using a formula – usually a percentage of final salary multiplied by years worked. The employer bears the investment risk and must keep enough money in the scheme to meet those future promises. That means the company’s balance sheet often shows a pension liability, and the actuarial valuation tells you whether the fund is over‑ or under‑funded.

In the UK, the Pensions Regulator requires regular funding assessments and a “recovery plan” if the scheme falls short. Most large firms run a “scheme assets‑to‑liabilities” ratio; a ratio above 100% is healthy, below that signals a gap you’ll need to close – usually by increasing contributions or adjusting benefits.

Managing Risks in 2025

Even though the promise is fixed, the reality is anything but static. Market volatility, longer life expectancies, and changes in inflation can all push the liability higher. Here are three practical moves to keep the plan in check:

• Stress‑test the fund. Run scenarios for a sharp equity decline, a jump in interest rates, or a 2‑year increase in life expectancy. Knowing the worst‑case impact helps you set realistic contribution levels.
• Consider de‑risking assets. Shift a portion of the portfolio toward high‑quality bonds or inflation‑linked securities. It reduces volatility while still matching the liability profile.
• Engage an independent actuary. A fresh actuarial report can spot hidden assumptions and suggest cost‑effective ways to improve funding, such as altering the accrual rate for new hires.

Keep communication open with the board and senior management. They need to understand that under‑funded DB schemes can affect credit ratings, borrowing costs, and even shareholder value.

Another tip: explore “cash balance” conversions. Some companies move part of the DB plan into a defined contribution (DC) format for newer employees. It offers certainty for the firm while preserving legacy benefits for existing staff.

When you’re reporting to regulators, make sure the data you submit is clean and timely. Late or inaccurate filings can trigger penalties and erode stakeholder trust.

Finally, think about the employee side. Transparent statements that show projected retirement income, assumptions used, and any funding shortfall help staff plan their own finances. A well‑informed workforce is less likely to demand sudden changes.

In short, a defined benefit pension remains a powerful tool for attracting talent, but it comes with a price tag that sits on the company’s balance sheet. By stress‑testing, de‑risking assets, and staying on top of actuarial reports, you can keep that price under control.

Got a specific question about your own DB scheme? Feel free to drop a comment – the Treasury Leaders Hub team loves digging into real‑world challenges and sharing practical solutions.