Chapter 5: Benefit overview and providers of benefits

Question 1

Defined benefit scheme

Answer 1

• Scheme rules define benefits independently of payable contributions.
• Benefits are not directly related to the investments of the scheme. Normally linked to final salary.
• The scheme may be funded/unfunded.

Question 2

Defined Contribution Scheme

Answer 2

• 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 3

Defined ambition

Answer 3

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

Question 4

4 providers of benefits

Answer 4

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

Question 5

4 Major roles played by the State

Answer 5

• Direct provision of benefits, eg on retirement, death, ill health
• Education on importance of provision
• Regulation to encourage or compel benefit provision
• Regulation of benefit providers

Question 6

4 Reasons for Employers sponsoring benefit provision

Answer 6

• compulsion/encouragement from the state
• paternalism
• to meet business objectives, eg attract and retain good staff
• to pool expenses and expertise

Question 7

2 Reasons for individuals to finance benefit provision

Answer 7

• compulsion/encouragement by the state/employers

- individual’s personal preferences

Question 8

4 Key features of pension contracts

Answer 8

• 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

Question 9

Occupational schemes

Answer 9

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

Question 10

Personal pension plans/arrangements

Answer 10

Purchased from an insurance company by an individual

Question 11

Active pension scheme member

Answer 11

Members still earning future pension benefits over time

Question 12

Deferred pension scheme members

Answer 12

Members who have stopped earning any future benefits but who have an existing benefit entitlement who used to work for the sponsoring company but has now left to work at another company.

Question 13

3 Main types of pension schemes

Answer 13

• defined benefit schemes
• defined contribution schemes
• defined ambition schemes

Question 14

Cash balance scheme

Answer 14

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

Question 15

3 ways the state can provide financial instruments for future provision

Answer 15

• direct investment in National Debt (government securities)
• State-sponsored savings plans (National Savings in the UK)
• deposits with the State bank, or local authorities.

Question 16

Fund segregation

Answer 16

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