5. Benefits overview and providers of benefits TOD

Question 1

What is a defined benefit scheme?

Answer 1

• The benefit is defined in terms of a set of rules
• For example as a percentage of final salary
• The benefit is not directly related to contributions paid or investment returns ✓ The scheme may be funded or unfunded

Question 2

What is a defined contribution scheme?

Answer 2

• The benefits depend directly on the contributions paid in respect of that member ✓ Increased by investment returns (earned net of charges).

Question 3

What is a defined ambition scheme?

Answer 3

• Risk are shared between the different parties involved
• Such as scheme members, employers, insurers and investment businesses
• Who are the 5 main providers of benefits? ✓ The state
• Employers or group of employers
• Individuals
• Financial institutions
• Other organisations

Question 4

What are the key roles of the state in benefit provision?

Answer 4

• Provide benefits to some or all of the population
• Sponsor the provision of such benefits
• Provide financial incentives=> through tax system
• For other providers to establish appropriate provision or
• Subsidise the cost of such provisions to consumers
• Educate or require education about the importance of providing for the future
• Regulate to encourage benefit provision by or on behalf of some of the population
• Regulate bodies providing benefits and bodies with custody of funds=> ensure security of benefit promises made

Question 5

What benefits may the state provide?

Answer 5

• Retirement
• Ill health
• Death
• Unemployment

Question 6

What are the possible role of employers in relation to benefit provision?

Answer 6

• Educating, and either encouraging or compelling employees to plan benefit provision.
• Financing of benefits for employees, in an orderly manner
• Providing a scheme for the provision of benefits

Question 7

Why do employers finance benefits for employees?

Answer 7

• Compulsion or encouragement from the state
• Attract and retain good quality employees
• Desire to look after employees and their dependents financially beyond the level of the state
• Pool expenses and expertise

Question 8

What is a multi-employer scheme and what is its key advantage and its key disadvantage?

Answer 8

• Benefit scheme set up jointly with other employers
• Often from the same industry
• It makes provisions more cost effective
• More care must be taken over allocating the liability for funding DBs
• Particularly in the event of the insolvency of one of the sponsors
• Problem reduced by fund segregation

Question 9

What is a flexible benefit system?

Answer 9

• Employees are offered options to choose between different benefits
• Which the employee can buy (reducing cash pay) OR
• Sell (increase cash pay)

Question 10

What are the roles of the individual in relation to benefit provision?

Answer 10

• Finance benefit=> schemes provided by state, employer insurance company. ✓ Individuals may use savings or domestic property=> to finance benefits ✓ Individuals may be incentivised to finance benefits by:
• Employers agreeing to match contributions up to a certain limit OR ii. Government tax incentives

Question 11

How can domestic property be used as a source of benefits for an individual?

Answer 11

• Home sold
• Loans secured on the accumulated equity of the house
• A capital sum=> available on inheritance of a domestic property

Question 12

What role do financial institutions play in the provision of benefits?

Answer 12

• Benefit schemes and insurance products
• Educate consumers on the importance of making benefit provisions
• Micro-insurance products are used=> simple products with low premium

Question 13

What other organisations provide benefits?

Answer 13

• Trade unions
• Credit unions
• Charities
• Chapter 6- Life insurance products