Ch 5: Benefits overview and providers of benefits

Question 1

Give three examples of “other organizations” that might provide benefits

Answer 1

1. Trade unions
2. Credit unions
3. Charities

Question 2

What benefits might the State provide?

Answer 2

The State may provide retirement, ill-health, death and unemployment benefits.

The State may also provide financial instruments such as national debt securities, State sponsored savings plans and the facility to deposit money in State bank accounts

Question 3

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

Answer 3

A multi-employer scheme is a benefits scheme set up jointly with other employers, often from the same industry.

Advantage: It makes provision more cost effective.

Disadvantage: More care must be taken over allocating the liability for funding DBs, particularly in the event of the insolvency of one of the sponsors.

Question 4

List the 6 key roles of the State in relation to benefit provision

Answer 4

1. Provide benefits to some, or all of the population
2. Sponsor the provision of such benefits, perhaps by providing appropriate financial instruments.
3. Provide financial incentives, usually through the tax system, either for other providers to establish appropriate provision, or to subsidize the cost of providing such provision to consumers.
4. Educate or require education about the importance of providing for the future.
5. Regulate to encourage or compel benefit provision by or on behalf of some of the population.
6. Regulate bodies providing benefits, and bodies with custody of funds, in an attempt to ensure security of promises made, or expectations created

Question 5

List 3 possible roles of employers in relation to benefit provision.

Answer 5

1. Educating, and either encouraging or compelling employees to plan benefit provision
2. Financing of benefits for employees, in an orderly manner
3. Providing a facility (scheme) for the provision of benefits

Question 6

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

Answer 6

The main role is to finance benefits through, for example, a scheme provided by the State, an employer, an insurance company or other financial organization.

Alternatively, individuals may use individual savings or domestic property to finance benefits, or by way of financial support from families or local community schemes.

Individuals might be incentivised to finance benefits through tax advantages or by employers matching employee contributions up to certain limits.

Question 7

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

Answer 7

They provide benefit schemes and insurance products.

They may also educate consumers on the importance of making benefit provision.

Question 8

List 5 reasons why employers finance benefits for employees.

Answer 8

1. Compulsion or encouragement from the State
2. A desire to attract and retain good quality staff
3. A desire to look after employees and their dependents financially beyond the level provided by the State.
4. To pool expenses and expertise

Question 9

Give 3 examples of how domestic property can be used as a source of benefits for an individual

Answer 9

1. The home could be sold
2. Loans can be secured on the accumulated equity in the home
3. A capital sum may be available on inheritance of a domestic property

Question 10

Defined Benefit Scheme

Answer 10

The benefit is defined in terms of a set of rules, for example a percentage of final salary for each year worked.

The benefit is not directly related to the contributions paid in or the investment returns earned.

The scheme may be funded or unfunded.

Question 11

Defined Contribution Scheme

Answer 11

The benefit relates directly to the contributions paid in respect of each member, increased by the investment returns earned on those contributions

Question 12

Defined Ambition Scheme

Answer 12

A scheme where risks are shared between the different parties involved, such as a scheme member, employers, insurers, and investment businesses

Question 13

5 main providers of benefits

Answer 13

1. The State
2. Employers or a group of employers
3. Individuals
4. Financial institutions
5. Other organizations

Question 14

Describe a flexible benefits system

Answer 14

Under a flexible benefits system, employees are offered the option to choose between benefits, which the employee can ‘buy’ or ‘sell’

They are given a notional amount which they can spend