CH 5: Benefit schemes and providers Flashcards

1
Q

4 Key features of pension contracts

A
  • means of providing income in retirement for an individual and possibly his/her dependents
  • may provide other benefits, ex lump sum payment to dependents if an individual dies
  • may have options to change the form/timing of the benefit, ex. an option at retirement to exchange a proportion of the pension payments for a cash payment
  • long-term arrangements
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2
Q

Occupational schemes

A

Offered by employers to their employees, where the employer usually pays a substantial percentage of the cost of providing the benefits.

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3
Q

Types of benefit schemes

Defined benefit scheme

5

A
  • Define benefits independently of payable contributions.
  • Benefits are not directly related to the investments of the scheme.
  • Benefits defined by formula eg linked to final salary (accrual rate) / years of employment.
  • The scheme may be funded/unfunded.
  • All Risk on the provider, pay in if shortfall occurs.
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4
Q

Cash balance scheme

A

A defined lump sum is provided at retirement as opposed to a defined pension through retirement

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5
Q

Defined Contribution Scheme

4

A
  • Benefits depend on contributions paid and investment returns
  • Members have investment options
  • Accum fund is used to purchase pension(annuity rate), take lump sum (33%), income drawdown
  • Risk on individual, investment and annuity rate risk. Longevity passed on if purchase annuity.
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6
Q

Hybrid Schemes

1

A

A scheme where risks are shared between the different parties involved, ex. scheme members, employers, insurers and investment businesses.

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7
Q

Funding of benefit scheme

3,1

A

DB:
* Cost of benefit uncertain till all have been provided
* Unfunded: No money set aside in advance, set aside just before benefit paid eg state
* Funded Money set aside in advance before benefits due, invested

DC:
* Money set aside gradually over lifetime, Timing and investment returns key for level of return.

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8
Q

Reserving for a benefit scheme

3,1

A

DB:
* Regulatory requirement for solvency.
* Determined by funding level of scheme
* Val Assets/Val Liabilities

DC:
* Less regulation as value of assets is linked to value of liabilities(benefits). Move together.

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9
Q

Providers of benefits

A
  • the state
  • employers
  • individuals
  • financial institutions (instance, banks, mutual funds and investment companies)
  • other organisations (trade union, employee association, religious organisations)
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10
Q

Roles of the state in provision of retirement benefits

5

A

Sponsor of benefits:
- For Gov employees

Provision of benefits:
- eg on retirement, death, ill health.
- Provides means-tested benefit, funded by taxation.

Incentives:
- Regulation for tax relief on contributions

Regulation:
- Tax breaks, compulsory joiners, min contributions

Education on importance of provision

SPIRE

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11
Q

Roles of the state in provision of other benefits

3

A
  • Healthcare, Social security, Income protection
  • eg. UIF, Child support, disability grants
  • Provides financial instruments for self provisions. Gov securities/deposits.
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12
Q

Roles of Employers sponsoring benefit provision

6

A
  • S: Flexible benefit sytem
  • P:
  • Single comp: share contributions(financing) between employer/ employee
  • Mult comp: Econ of scale, easy migration
  • I
  • E

SPIE

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13
Q

Fund segregation

A

means holding the pension scheme’s investments separate from the company, usually overseen by trustees.

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14
Q

Reasons for Employers sponsoring benefit provision

4

A
  • compulsion/encouragement from the state
  • look after interests of employees
  • attract and retain good staff
  • to pool expenses and expertise
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15
Q

Roles for individuals to finance benefit provision

2

A
  • Finance a benefit via contributions through scheme provided by state, employer, insurance company, other institution.
  • Choice depends on regulation and incentives.
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16
Q

Other institutions that provide benefits

3

A
  • Informal eg.stockvel -savings vehicle with contributions
  • Unions- can provide microinsurance to members.
  • Charities