Chapter 5-Benefits overview and providers of benefits Flashcards
- Define a defined benefit scheme and a defined contribution scheme.
A defined benefits scheme is one where 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 or unfunded.
A defined contribution scheme is one providing 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.
- Which four parties are the main providers of benefits?
- the State
- employers or groups of employers
- individuals
- financial institutions or other corporations.
- In which three main ways can the State play a role in benefit provision?
- direct provision
- encouragement of provision
- the regulation of provision from other providers.
- Describe the six roles that the State might play in the provision of financial benefits.
The political, economic and fiscal viewpoints of the State will determine the precise roles that it will play. However, the roles are likely to fall within the following categories:
• provide benefits to some or all of the population
• sponsor the provision of such benefits, perhaps by providing appropriate financial instruments
• provide financial incentives, usually through the tax system, either for other providers to establish appropriate provision, or to subsidise the cost of such provision to consumers
• educate or require education about the importance of providing for the future
• regulate to encourage or compel benefit provision by or on behalf of some of the population
• regulate bodies providing benefits, and bodies with custody of funds, in an attempt to ensure security for promises made, or expectations created.
- For countries where life expectancy extends well beyond working age, for which type of benefit is the State likely to play the greatest role and why?
In countries where life expectancy extends well beyond working age, retirement benefits are likely to be of high financial significance. Often they are not recognised as such by the potential recipients. The State is likely to play a large role in ensuring the population receives or has the opportunity to receive income after retirement.
- Give an example of a country where the State can sponsor the provision of benefits for employees.
For example, in the UK, all employers are required to provide a pension arrangement for their employees and to enrol employees earning more than a minimum amount into the scheme automatically, giving them an option to opt out rather than a requirement to opt in to the arrangement. To help small employers, perhaps with only one or two
employees, the State has sponsored a pension arrangement ‘NEST’ (National Employments Savings Trust), which can be set up at no direct cost to the employer.
- Give two examples of insurance classes which are compulsory in the UK.
These usually cover risks with low probability and potentially high payouts.
In the UK and most developed countries, motor third party liability and employer’s liability insurance are compulsory.
- On what does the extent to which the State intervenes in the provision of benefits depend?
The extent to which the State makes direct provision, educates the public, compels provision or encourages provision of non-retirement benefits depends on the perceived significance and importance to the individuals of the benefits. Benefits to protect individuals against loss or costs due to long-term ill health or to protect dependants on the death of an individual are often also considered important. The role of the State in relation to these benefits may, therefore, be very similar to that adopted for retirement benefits.
- Give three examples of financial instruments provided by the State through which individuals can make their own provision for future benefits.
- direct investment in the National Debt (government securities)
- State-sponsored savings plans (National Savings in the UK)
- deposits with the State bank, or with local authorities.
- Describe the roles that an employer might play in the provision of benefits.
Like the State, employers can play a role in educating and either encouraging or compelling their employees to plan benefit provision.
However, perhaps the most significant role that can be played by employers is the orderly financing of benefits for their employees.
Another role that an employer may play is to provide a facility for the provision of benefits, ie a scheme. This may enable the employer to have greater control over the benefits being provided and the costs involved. Employer-sponsored pension schemes are common in many countries.
- List the main reasons why an employer may finance benefits for employees.
Such financing may result from:
• compulsion or encouragement from the State
• a desire to attract and retain the services of good quality employees
• a desire to look after employees and their dependants financially beyond the level provided by the State
• pooling of expenses and expertise.
- Define the term ‘flexible benefit system’ and describe when a flexible benefit system might be useful.
In some countries employers provide a ‘flexible benefit’ system.
Employees have a choice between, for example, additional salary, additional pension benefits, additional holiday, enhanced death in service benefits, long-term sickness benefits, etc. Each benefit is valued, and the employee has a notional sum of money to purchase benefits.
- Which two parties might finance a single-employer scheme?
The financing of a scheme could, subject to legislation, be shared between the employer and the employees who will receive the benefits.
- Why might a scheme be set up by more than one employer? What problem might this lead to?
In some cases these schemes are set up jointly with other employers, often from the same industry, as a means of making provision more cost effective. This use of multi-employer schemes leads to a need for greater care in allocating the liability for funding defined benefits, particularly in the event of the insolvency of one of the sponsors. Fund segregation is usually important in reducing such problems.
- What is the main role that an individual can play in the provision of benefits? What may this result from?
Like employers, the main role that individuals can play in the provision of benefits is in financing the benefits. This may result from compulsion or encouragement from either the State or an employer or a personal desire for larger benefits for themselves or their dependants than are provided by either the State or an employer.
