07 - Retirement and social benefits, and related products

Question 1

What are the main categories of benefits that individuals may purchase in the individual benefit market?

Answer 1

Retirement benefits, often through a retirement annuity

Death and disability benefits

Funeral cover

Health and care products

Question 2

Describe the difference between direct and indirect discrimination in the context of benefit eligibility.

Answer 2

Direct discrimination occurs when a person is treated less favourably because of a personal feature.

Indirect discrimination occurs when a rule appears to be neutral, but has a disproportionate impact on a particular group.

Discrimination based on sex and age is illegal in many countries, while in others it is allowed as an acceptable rating practice.

Question 3

What is the “earnings definition” in retirement fund administration, and why is it important?

Answer 3

Earnings definition is the salary definition used for retirement fund administration and is also called pensionable salary or scheme salary.

It’s used across all benefits, including health and care products.

It is linked to contributions or premiums.

Question 4

Explain the different membership categories in a retirement fund and the movement between them.

Answer 4

Active members are currently contributing to the fund.

Deferred members or ‘paid-up members’ have left the employer but are still in the fund.

Disabled members are those who receive income payments due to disability.

Pensioner members are those receiving retirement benefits.

Members can move between these categories.

Exits from the fund are called decrements.

Question 5

What is the Normal Retirement Age (NRA), and what factors influence its choice?

Answer 5

NRA is the age specified in the employment contract when an employee will stop working and is eligible for retirement benefits.

Factors influencing NRA:
▪ Longevity trends
▪ Relevant state retirement age
▪ Ability of workers to continue working at older ages
▪ Employer and national requirements
▪ Level of benefit the fund wishes to deliver and the time it will take to build up that benefit

Question 6

Contrast the key differences between Defined Benefit (DB) and Defined Contribution (DC) pension schemes.

Answer 6

DB schemes: The benefit is defined in the rules, and the employer bears the risk of adverse experience.

DC schemes: The contribution is fixed, and the member bears the risk of adverse experience.

Question 7

What is a ‘notional DC’ or ‘cash balance’ fund, and how does it function?

Answer 7

It is a type of hybrid fund.

The benefit is defined as if it were a DC fund, but is not fully funded.

Benefits are based on contributions made, but with a “notional” interest rate.

Risks are shared between generations, and there is greater risk sharing between stakeholders.

Question 8

What are some advantages and disadvantages of member-matching contributions in a DC fund?

Answer 8

[Advantages]
* Encourages saving for retirement.
* May pay more to workers who save more.
*May offer a tax incentive.

[Disadvantages]
* Lower-income employees might struggle to make significant contributions.
* Increased payroll administration.

Question 9

Describe the concept of “smoothed returns” in the context of pension fund allocation.

Answer 9

Smoothed returns are when the average return earned over a period (e.g. the last 2 years) is allocated to members on an annual basis.

It prevents significant differences in benefits for members due to timing of their exit.

Smoothing periods can be long or short.

Question 10

How can members utilise their accumulated fund credits in a DC fund at retirement?

Answer 10

Members can take their accumulated fund credit as a lump sum, an income benefit, or a combination.

Income benefits can be provided via life annuities or income drawdown products.

Some DC funds allow members to purchase a pension from the fund, becoming a pensioner member of the fund itself.

Question 11

Explain the key concepts in the final salary scheme benefit formula.

Answer 11

Accrual rate: The rate at which the pension benefit is built up, often expressed as a fraction of annual salary.

Service period: The period during which the member was in service.

Earnings: The definition of earnings used for calculating the benefit.

Question 12

What is meant by “revalued earnings” in a final salary scheme, and why is it used?

Answer 12

Revalued earnings are adjusted earnings to compensate for inflation.

They are used because earning averages over a period may not reflect inflation.

Question 13

What is a flat-rate benefit, and how does it differ from earnings-related benefits?

Answer 13

A flat-rate benefit is paid equally to everyone, regardless of earnings history.

Earnings-related benefits are directly linked to a member’s earnings.

Flat-rate benefits are simple to understand and administer and may be suitable for providing a basic standard of living.

Question 14

What are some factors that can impact the total contribution rate in a DB fund?

Answer 14

The design of the fund and the benefits provided.

The actuarial funding method used.

The assumptions adopted (e.g., salary inflation, mortality, discount rate).

The surplus or deficit arising due to experience deviating from what was assumed.

Question 15

What is a ‘defined ambition’ (DA) fund and how does it compare to a DC fund?

Answer 15

A DA fund is a DC fund with a specific level of retirement benefit specified as a goal.

Unlike a DC fund, the contribution rate is not fixed and can be varied.

Question 16

What are Additional Voluntary Contributions (AVCs), and how can they be used?

Answer 16

AVCs are additional contributions made by members to a retirement fund.

In DB funds, AVCs can assist in buying extra service or accruing additional DB benefits.

In DC funds, AVCs are added to the member’s accumulated fund credit.

Question 17

What are the typical benefit events in a retirement fund?

Answer 17

• Retirement
• Ill-health retirement
• Disability
• Withdrawal
• Death

Question 18

Explain the concept of a “death-in-service” benefit.

Answer 18

• It is a benefit paid upon the death of an active member.
• It is typically paid as a lump sum to the member’s dependents.
• The benefit can be structured in a DB scheme either in full or in part as a fraction of what the member would have received at retirement.

Question 19

What are the common reasons for withdrawal from an employer-sponsored retirement fund, and what is “encashment”?

Answer 19

• Resignation: When the employee leaves of their own choice.
• Dismissal: When an employee is fired.
• Retrenchment: When the employee leaves due to redundancy.
• Encashment is another term for cashing out the value of a retirement fund.

Question 20

What is a “vesting scale,” and why is it relevant to employer contributions to a retirement fund?

Answer 20

A vesting scale is a schedule that determines how much of the employer’s contributions a member is entitled to if they leave the fund before a set date.

It is used to encourage employee retention.

Question 21

Describe some common forms of death-after-retirement benefits.

Answer 21

The most common form is the annuity guaranteed period, where payments continue for a set period (often 5 years) regardless of death.

Payments to a spouse can also be structured with a reversion percentage.

Question 22

What are the main arguments for and against providing retirement benefits in the form of annuities versus lump sums?

Answer 22

Arguments for annuities: Provide a regular income, cover longevity risk

Arguments against annuities: Less flexible, lower financial flexibility

Arguments for lump sums: More flexible, can leave as inheritance

Arguments against lump sums: May be spent too quickly, more challenging to manage

Question 23

What are “commutation options” in a DB fund?

Answer 23

Commutation options allow a member to exchange part of their pension for a lump sum.

The lump sum is calculated using an actuarial factor, which is based on the prevailing market conditions.

Question 24

What are some common features of umbrella funds, and how do they differ from stand-alone funds?

Answer 24

Umbrella funds are larger and can be more cost effective.

They offer investment choice, member communication, and wide range of benefit options.

Stand-alone funds provide greater control over the benefits provided.

Question 25

What are some key differences between life annuities and income drawdown products?

Answer 25

Life annuities: provide a guaranteed income stream for life.

Income drawdown products: the pensioner manages investment and bears the longevity risk.

Question 26

What is meant by “adverse selection” in the context of life annuities, and how do insurance companies try to manage it?

Answer 26

Adverse selection occurs when individuals with low life expectancies are less likely to purchase annuities, raising prices.

Insurance companies may implement risk-rating by factors other than age and sex, or segregate annuity purchasers into different categories.

Question 27

What are some common legislative regulations affecting the demand for life annuities?

Answer 27

Some regulators impose mandatory annuitisation.

Some countries impose minimum withdrawal amounts.

Some countries impose restrictions on the way DC plans can provide an income.

Question 28

What are the main types of in-service incapacity or disability benefits, and how can they be provided?

Answer 28

[Lump sum]
* Potentially greater benefit in cases of short life expectancy.

[Income benefits]
* More beneficial where ill health prevents long term employment.
* They can be provided by state, employer, retirement fund or an insurance policy.

Question 29

What factors influence the cost of disability benefits?

Answer 29

The disability definition, which affects the frequency or likelihood of qualifying.

The deferred period, which is the period of time that must pass before the benefit is paid.

Question 30

What is the difference between a “funeral cover” and “group life assurance” offered by employers?

Answer 30

Funeral cover: A fixed amount paid out shortly after the claim.

Group life assurance: A fixed amount or multiple of salary, paid to dependents upon the death of the employee.

Question 31

Explain how death benefits can be structured to account for cross-subsidies between different groups of employees.

Answer 31

Employers can use an age-banded scale to make death benefits for older employees higher.

They can also provide a fixed multiple of salary to all employees.

The benefits can be structured to provide a specified period of salary for the dependents.

Question 32

What are long-service awards, and how do they function?

Answer 32

Long-service awards are a reward to employees for long service.

They are typically monetary or gifts, with the benefit increasing with years of service.

Question 33

Explain the meaning of “retrenchment benefits.”

Answer 33

Retrenchment is when an employee’s employment is terminated due to operational reasons.

Retrenchment benefits are usually negotiated with unions and can include severance pay and other additional incentives.

Question 34

What are some forms of performance-related pay, and how do they function?

Answer 34

A bonus is an additional payment based on performance.

Performance-based pay incentivizes employees and helps align goals.

Profit sharing is another form of bonus based on the profitability of the business.

Question 35

What are some examples of other employee benefits that are typically provided by employers?

Answer 35

Personal accident cover, medical insurance, and subsidized healthcare.

Retirement, housing, social environment, nursing care, permanent disability benefits.

Family support benefits, subsidized goods and services.

Question 36

How are unemployment benefits typically funded?

Answer 36

Unemployment benefits are funded by payroll taxes and can be considered a mandatory form of risk pooling among employed workers.

The funds are usually kept in a separate account.

Question 37

What are some common forms of child grants and benefits provided by the state?

Answer 37

A per-child cash payment, usually paid to the primary caregiver.

Tax incentives and tax credits for families with children.

Subsidized healthcare, free or subsidized education, and paid parental leave.

Question 38

What are some ways that the state can provide housing benefits?

Answer 38

Free or subsidized housing, usually means-tested or contingent on meeting certain criteria.

Publicly provided homes at reduced prices.

In some cases, the state may also encourage homeownership.

Question 39

What are some common forms of “miscellaneous” state-provided benefits?

Answer 39

Food benefits to poor people or subsidies for basic food.

Benefits payable to war veterans.

Grants to cover costs of foster parenting or caring for disabled children.

Benefits to citizens during declared states of emergency.