CH5 - Providers of benefits

Question 1

Types of schemes (3)

Answer 1

1. Defined benefit
2. Defined contribution
3. Defined ambition

Question 2

Defined benefit sheme

Answer 2

The scheme rules define the benefits independently of the contributions payable, and benefits are not directly related to the investments of the scheme. The scheme may be funded of unfunded.

Question 3

Defined contribution scheme

Answer 3

The scheme provides benefits where the amount of an individual member’s benefits depends on the contributions paid into the scheme in respect of that member, increased by the investment return earned on those contributions.

Question 4

Defined ambition scheme

Answer 4

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

Question 5

Benefit providers (5)

Answer 5

Benefits may be provided by:

1. the State
2. employers
3. individuals
4. financial institutions
5. other organisations

Question 6

Major roles played by the State (6)

Answer 6

The major roles played by the State are:
1. direct provision of benefits, e.g. on retirement, death, ill-health
2. sponsoring of the provision of benefits
3. provision of financial incentives
4. education
5. regulation to encourage or compel benefit provision
6. regulation to benefit providers
The State can also provide financial instruments, e.g. the issue of bills and bonds, savings plans, deposits with the State Bank.

Question 7

Reasons for employers for sponsoring benefit provision (4)

Answer 7

1. compulsion or encouragement from the State
2. the attraction and retention of good quality staff
3. a desire to look after employees and their dependants
4. to pool expenses and expertise

Question 8

Employers as providers of benefits

Answer 8

• Benefits can be provided through a formal employer-sponsored scheme. This can ensure a consistent approach across employees or help the employer target certain groups, e.g. long servers or high fliers. Such schemes could be set up to offer members a choice of benefits.
• Organisations can tailor the benefits offered to employees using a flexible benefits system. Under a flexible benefits system, employees can trade in some of their existing benefits for other financially equivalent benefits.
• Employer-sponsored schemes do not have to be backed by a single employer but can be sponsored jointly by many employers, e.g. industry-wide schemes

Question 9

Motives for individuals financing benefit provision (2)

Answer 9

Apart from being beneficiaries, individuals finance benefit provision. The motive for this can be:

1. compulsion or encouragement by the State or employers
2. the individual’s personal preferences

Question 10

Individuals as providers of benefits

Answer 10

• The provision can be formally structured savings plans, generated by the State, employers or other financial organisations. Alternatively, individuals can make informal unstructured arrangements.
• Individuals may use domestic property as an investment to meet retirement needs or they may benefit from property through inheriting it.

Question 11

Financial institutions and other corporations as providers of benefits

Answer 11

• The vehicle for providing benefits is often provided by financial institutions either via employer-run schemes or directly to individuals
• Institutions are also proactive in highlighting the need to individuals to make provision
• Other organisations such as trade unions, credit unions and charities can also advice individuals on provision