05. Defined Benefit Schemes Flashcards
What is a defined benefit scheme?
One that provides a pension based on a % of salary at or close to retirement.
Why might a DC underpin be beneficial for employees who leave the scheme before normal pension age?
Because the preserved DC account should still grow and may well produce a better pension than the DB preserved pension.
What are career average schemes?
Those where the formula used to determine DB benefits is based on average earnings, thus reducing cost to employer of operating the scheme.
What are integrated schemes?
The pension provided is reduced in some way to take into account member’s State Pension.
What are AVC or FSAVC schemes used for?
To top up employer’s DB benefit schemes.
Where an AVC arrangement is offered within a DB scheme, it may be possible to use AVC contributions to buy what?
Added years of service in the scheme.
A DB scheme is governed by what?
A trust.
What is a bridging pension?
What a DB scheme can pay where the scheme’s normal pension age is lower than the SPA.
It is ___ and ___ to arrange membership for automatic enrolment of DC schemes vs DB ones.
- quicker
- cheaper
Common rules on scheme eligibility to join:
- a minimum entry age
- a probationary or ‘waiting period’
- diff categories of employees
- diff level of benefits for each cat
What are the 3 factors which will define DB retirement or death benefits?
- definition of ‘pensionable service’
- definition of ‘pensionable remuneration’
- definition of ‘accrual rate’
Name factors which affects how much an employer must contribute into a DB scheme.
- £
- returns
- rates
- £: NRA
- vol: NRA
- dem
- level of members’ final pensionable future remuneration
- investment returns achieved
- annuity rates available when member comes to retirement
- cost of providing guaranteed benefits to members who leave scheme before NPA
- number of members who die before NPA
- profile of scheme membership e.g. age, marital status
What is the required frequency that the scheme’s actuary must calculate the level of employer contribution required?
At least every 3 years.
How are employee contributions set? [2]
- as a % of pensionable salary
- as a constant
Members who were contracted out between 6 Apr 1978 and 5 Apr 1997 built up an entitlement to what?
GMP
What is a pension increase exchange (PIE)?
Where the member is offered the option of giving up future guaranteed increases to their pension in return for a higher initial pension with no future increases other than statutory increases.
Name 3 reasons why PIEs are popular with DB schemes.
- pensions that escalate in payment are expensive to provide
- cost of the increases is an unknown liability; less longevity & inflation risk
- employer does not suffer a large one off ‘cost’ in offering the PIE
Name 3 potential benefits to members of PIEs.
- higher initial income when younger, active & healthy
- may have a higher PCLS entitlement
- better for those in poor health or with lower life expectancies
Name 3 drawbacks to members of taking PIEs.
- may be worse off if live longer
- as PCLS entitlement likely to be higher, max entitlement might be capped by LSA
- higher initial pension may affect entitlement to means tested state benefits
What is an incentive exercise?
An invitation or inducement provided to a member to change the form of their accrued defined benefits rights in a UK registered pension scheme.
What 2 tests must be met for an incentive exercise to be applicable?
- one objective of providing it is to reduce the risk or cost for the pension scheme or sponsors; and
- it is not ordinarily available to members of the pension scheme.”
Excerpt From
Pensions and retirement planning
Helen Savage, BSc (Hons), Maria Shortland FPFS
This material may be protected by copyright.
DB schemes must undertake an actuarial scheme valuation every ___. However, this can be extended to every ___ years where the scheme’s trustees obtain actuarial reports in the intervening years.
- year
- 3
A ~~~ must be set for all private sector defined benefit schemes and under this objective, the scheme trustees must ensure that the scheme funding meets the scheme’s ~~.
- statutory funding objective
- technical provisions
What are a scheme’s technical provisions?
These are the amount of assets needed to cover the scheme’s future liabilities as they fall due.
The trustees must set up a ~~~~ and what must this detail?
- statement of funding principles
- how the statutory funding objective will be met.
A schedule of contributions must be produced, specifying the rates of contributions to be paid by both the employer and the members. This must be done within ~~ of the valuation’s effective date.
15 months
If the statutory funding objective has not been met, what must be done?
A recovery plan must be drawn up.
What is IAS 19?
Accounting standard which directions on the accounting treatment of defined benefit assets and liabilities which aims to make the cost to the company of running its pension scheme more transparent.
