07 - Retirement and social benefits, and related products Flashcards
What are the main categories of benefits that individuals may purchase in the individual benefit market?
Retirement benefits, often through a retirement annuity
Death and disability benefits
Funeral cover
Health and care products
Describe the difference between direct and indirect discrimination in the context of benefit eligibility.
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.
What is the “earnings definition” in retirement fund administration, and why is it important?
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.
Explain the different membership categories in a retirement fund and the movement between them.
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.
What is the Normal Retirement Age (NRA), and what factors influence its choice?
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
Contrast the key differences between Defined Benefit (DB) and Defined Contribution (DC) pension schemes.
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.
What is a ‘notional DC’ or ‘cash balance’ fund, and how does it function?
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.
What are some advantages and disadvantages of member-matching contributions in a DC fund?
[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.
Describe the concept of “smoothed returns” in the context of pension fund allocation.
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.
How can members utilise their accumulated fund credits in a DC fund at retirement?
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.
Explain the key concepts in the final salary scheme benefit formula.
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.
What is meant by “revalued earnings” in a final salary scheme, and why is it used?
Revalued earnings are adjusted earnings to compensate for inflation.
They are used because earning averages over a period may not reflect inflation.
What is a flat-rate benefit, and how does it differ from earnings-related benefits?
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.
What are some factors that can impact the total contribution rate in a DB fund?
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.
What is a ‘defined ambition’ (DA) fund and how does it compare to a DC fund?
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.
What are Additional Voluntary Contributions (AVCs), and how can they be used?
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.
What are the typical benefit events in a retirement fund?
- Retirement
- Ill-health retirement
- Disability
- Withdrawal
- Death
Explain the concept of a “death-in-service” benefit.
- 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.
What are the common reasons for withdrawal from an employer-sponsored retirement fund, and what is “encashment”?
- 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.
What is a “vesting scale,” and why is it relevant to employer contributions to a retirement fund?
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.
Describe some common forms of death-after-retirement benefits.
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.
What are the main arguments for and against providing retirement benefits in the form of annuities versus lump sums?
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
What are “commutation options” in a DB fund?
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.
What are some common features of umbrella funds, and how do they differ from stand-alone funds?
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.