Types of workplace pension – what are they and how do they work?

Discover the different types of workplace pension, how they work, and which one is best for your business.

Published: 15 Dec 2025

Key points

There are two main types of workplace pension – defined contribution and defined benefit schemes.
Your responsibility as an employer is to choose a workplace pension that suits the needs of your business and your employees.
Some types of workplace pension offer more flexibility than others, so you’ll need to consider what your employees need from the pension.

What are the different types of workplace pension?

A workplace pension is in place to help your employees save for their retirement. When it comes to choosing a pension scheme that’s right for your business, there are few options that all work a little differently.

Defined contribution

These are the most common type of workplace pension. The employer and employee both make contributions into a pension pot, which is then invested in a fund across stocks, shares and other asset classes, such as UK commercial property and cash.

The value of the employee's pot at retirement depends on how the funds perform, as well as any charges or fees taken.

Defined benefit

This is an older type of pension scheme. They’re usually more expensive for employers to run than a defined contribution scheme. Employees get a set retirement income based on their salary and length of service. But although they protect members from investment risk, defined benefit schemes tend to be more complicated for employers to set up and manage.

Current trends in workplace pensions

Since auto-enrolment was introduced in 2012 - making it compulsory for all employers to offer a defined contribution (DC) pension, many employees have built up multiple pension pots as they move between jobs. This has led to a growing demand for pension consolidation to make savings easier to manage. As an employer, you can help by setting up a workplace pension that allows employees to bring their pensions together seamlessly.

DC pension schemes have also become more popular since the introduction of the Pension Freedoms Act in 2015, which gave employees greater flexibility in how they access their savings at retirement. This change moved retirement options beyond annuities to include flexible choices such as drawdown and lump-sum withdrawals.

Another trend is the shift towards Master Trust pensions. These larger schemes offer strong governance, an independent trustee board, and lower administration costs. You can learn more about this trend in our article: What’s driving the move to Master Trust?

We’re also seeing increased interest in sustainable investing - funds that consider environmental, social, and governance (ESG) factors. However, it’s not just about ESG. Employees want access to a broad range of investments across different asset classes and risk levels, including ethical funds and more traditional options. This flexibility allows them to invest in a way that aligns with their values and financial goals.

As with any investment, the value of pension funds can go down as well as up, and employees may get back less than they’ve paid in.

How to choose a workplace pension provider

There are five key factors to consider when choosing a pension provider:

What are the costs involved with a pension scheme?
What investment options, including self-select funds, does the provider offer?
What benefit options does the provider offer?
Do they have member support and digital tools available?
Will they support you with governance and compliance?

We’ve written about this in more detail in our article – Choosing a workplace pension provider.