5. Benefit Schemes Flashcards
Features of pension contracts
- Provide income in retirement
- Other benefits e.g. death in service
- May be options to change form/timing
- Long term
Benefit providers
- State
- Employers (may be joint sponsors)
- Individuals
- Financial institutions
- Other organisations
Types of scheme members
- Active
- Deferred
- Current
DC fund
Amount of benefit depends on contributions paid in respect of member increased by investment return earned on contributions
DB fund
Benefits are independent of contributions payable and investment returns
Defined ambition fund
Risks are shared between different parties involved.
Examples III-lar to DB:
- Cash balance schemes (defined lump sum)
- Increasing the retirement age and transferring longevity risk
Examples III-lar to DC:
- DC schemes that offer minimum investment guarantees/minimum income guarantees.
Provisioning
DB funds have stricter requirements to check assets and liabilities since for DC value of liabilities relies on assets the contributions are invested in
Roles played by the state in benefit provision
- Direct provision
- Sponsor
- Providing financial incentives
- Education
- Regulation to encourage/compel provision
- Regulating providers
- Providing financial instruments
Examples of financial instruments the state can provide for benefits
- Direct investment in national debt
- Savings plan
- Deposits with state bank/local authorities
Reasons why employers may sponsor benefits
- Compulsion/encouragement from state
- Attract and retain good quality staff
- Desire to look after employees + their dependents
- Pool expenses + expertise
How flexible benefits may meet employee needs
- Allows for selection from menu of different benefit options
- Different groups within workforce can select appropriate benefits
- Benefit packages can be changed over time as personal circumstances change
Examples of other organisations who may provide benefits
- Trade unions
- Credit unions
- Charities
- Informal providers (stokvels and burial societies)
How flexible benefits may meet employer’s needs
- Aids in recruitment and retention of good quality staff
- Reward package can be made attractive to different groups
- Improves employee satisfaction because they get value + benefits
- Cost effective since employer doesn’t have to pay for benefits not valued by employees
- Introducing benefits can be done at little/no cost
- Annual enrolment in scheme, reminding employees of value of benefits and improving employee appreciation
