Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

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What is the amount received in a defined contributions occupational pension scheme dependent upon?

Employee tenure
The investment performance
Company profits
Market conditions

The correct answer is: The investment performance

In a defined contributions occupational pension scheme, the amount received at retirement primarily depends on the investment performance. This type of scheme operates by accumulating the contributions made by both the employee and the employer over time, which are then invested in various assets. The total value of these investments at retirement determines the benefits received. Therefore, if the investments perform well and yield high returns, the final amount available to the employee can be significantly larger. Conversely, underperforming investments can lead to a lower retirement payout. This reliance on investment performance distinguishes defined contributions schemes from defined benefit schemes, which assure a specific payout based on a predetermined formula regardless of investment fluctuations. While employee tenure, company profits, and market conditions can influence aspects of the scheme, such as contribution levels or the investment options available, they do not fundamentally determine the retirement benefit itself. The main factor that directly impacts the amount received is indeed the performance of the investments chosen within the scheme.