Chapter 5 - Benefits overview and providers of benefits Flashcards
Discuss what a defined benefit scheme is.
Benefits are defined independently of the contributions payable. Risk is mainly on the provider.
Benefits are not directly related to the investments of the scheme. Will be defined by some formula.
Scheme may be funded or unfunded.
Strict regulatory requirements with regards to provisioning. Financial position expressed through funding level (assets/liabilities).
Contributions need to be sufficient to meet cost of future benefits and any income/outgo due to inappropriate funding level (too high or low).
What is a defined contribution scheme?
Benefit depends on the accumulation of contributions paid into the scheme. Risk is mainly on the policyholder.
Member may have some choice in the investment strategy based on their risk appetite.
Member may have a choice of how to use the benefit once claimed. In SA, 33% lump sum (max) or 100% (no in-between). Regulations introduced to encourage annuity purchase for long-term savings.
Not subject to same regulatory valuation requirements as defined benefit schemes because value of liabilities is directly related to the value of the assets.
Contribution rate will be defined in the scheme design and members may have some choice in the matter.
What is a hybrid scheme?
Risk shared between parties involved.
Part guaranteed benefit and part related to investment returns.
What are the key risks for a benefit provider, and possibly the policyholder?
Investment risk Longevity risk Expense risk Operational risk Credit risk
List the main benefit providers. (5)
State Employers/Groups of employers Individuals Financial institutions Other organisations
List the main roles a state is likely to play in providing benefits.(main three and then in depth breakdown (7))
Direct provision, encouragement of provision and regulation of provision:
- Provide financial instruments such as bonds, state-sponsored savings plans and statutory deposits through which individuals and institutions can make provision for future benefits.
- Provide financial incentives for benefit providers and receivers, such as tax breaks or subsidies.
- Educate or require education in schooling systems about importance of benefits.
- Regulation to compel involvement.
- Regulation of benefit providers.
Provide benefits to some/whole population (means-testing)
Sponsor the benefits
What are the main roles an employer plays in providing benefits?
Education of employees
Encouraging or compelling employees to plan benefit provision.
Provide a facility for the provision of benefits.
Why would an employer want to provide benefits to their employees?
Compulsion or encouragement from the state through tax incentives or regulation.
Desire to obtain and retain good quality employees.
Desire to look after employees and their dependants financially beyond the State level.
Pooling of expenses and expertise.
What is a stokvel?
Small group of members contribute regular fixed money amounts into a central fund. Fund can be used to savings, investment or for specific events/occurrences.
