Chapter 5: Benefits overview and providers of benefits Flashcards
What is the role of companies in benefit provision
Pay for part of or all the cost of benefits.
What is the role of Pension schemes in benefit provision
Provide a vehivle for the benefits
Who are the key providers of benefit
Time: saving for retirement
- The state
- Employers
- Individuals
- Financial institutions
- Other organisations
What are the key features of pension contracts
- Provide retirement benefits
- Provide other benefits such as withdrawal and death
- Can have the option to change the form and timing of the benefit
- They are long-term
Who provides pensions
Time: retirement
- Occupational schemes
- Personal pension plans
Name the types of pension scheme memebers
- Active
- Deffered memebers
- Current pensioners
Explain the following types of pernsion scheme members:
* Active
* Deffered memebers
* Current pensioners
- Active - Still earning future pension benefits over time - still contributing
- Deferred memebers - Have stopped earning future benefits but have existing benefits
- Current pensioners - paid all the due payments and now receiving benefits
Name the main types of pension schemes
- Defined benefits
- Defined contribution
- Hybrid schemes
What is a defined benefit scheme
- Scheme rules define the benefit independently of the contribution,
- The benefits are not directly related to the investments of the scheme
- Even if the investments do not do well, the memeber will still receive the agreed benefit
What is a defined contribution scheme
- Amount of a member’s benefit depends on the contribution made to the scheme.
What is a hybrid scheme
Risks are shared between the different parties involved
Examples of hybrid schemes
- Cash balance - lump sum at retirement
- Schemes where retirement age is increased for future service in light of increasing longegivity
Who does the risk lie on in a defined benefit scheme ?
Be sure to elaborate
The provider - contributions need to meet a set future benefit, so the money they are putting into the fund may be volatile year-to-year
Who does the risk lie on in a defined contribution scheme ?
Be sure to elaborate
The member - future benefits depend on the contributions made, so the memeber has to make sure that the contributions are enough for retirement
How would a member’s benefit increase in a defined contribution scheme
Return on the fund
What choices does a memeber of a defined contribution have after retirement
- Annuity
- Keep invested in the fund and withdraw regularly
- Take it as a lumpsum
How are defined benefit schemes funded or unfunded
Funded - money placed aside and investment returns can be earned
Unfunded - pay-as-you-go basis
How is a defined contribution scheme funded
Money is set aside over the working life of the member
What regulatory schemes is a defined benefit scheme subject to
Assets enough to meet liabilities regulalarly
Why is a defined contribution scheme not subject to the same regulatory requirements as a defined benefit
Liabilities (payouts) are usually equal to assets (what is in the fund)
What should benefit schemes take into account when making investment strategies.
- Tax relief
- Constrained by regulation
How does the state influence provision
- Direct provision
- Encourage provision
- Regulation of provision
What is the state in turn influenced by
- Political viewpoints
- Economic viewpoints
- Fiscal viewpoints
What are the categories of the role of the stae
- Provision of benefits
- Sponsoring of benefits
- Provide financial incentives
- Education or require education about the importance of providing for the future
- Regulate to encourage or compel benefits by or in behalf of part of the population
- Regulate bodies providing benefits
Explain the following role of the state with respect to retirement benefits:
* Provision of benefits
* Sponsoring of benefits
* Provide financial incentives
* Education or require education about the importance of providing for the future
* Regulate to encourage or compel benefits by or in behalf of part of the population
* Regulate bodies providing benefits
Be sure to explain long-term and short-term attainment
- Needed in countries where life expectency»_space;> retirement age
- There is the option of passing this on to employers, but the state will have to make provisions for the unmeployed and the self-employed.
- Ensuring that they can meet their basic needs in retirement
- Met by borrowing in the short-run and hiking taxes in the long-run
Explain the following role of the state with respect to retirement benefits:
* Provision of benefits
* Sponsoring of benefits
* Provide financial incentives
* Education or require education about the importance of providing for the future
* Regulate to encourage or compel benefits by or in behalf of part of the population
* Regulate bodies providing benefits
- Employers may contribute towards an employee’s retirement
- Individuals may also contribute to their retirement benefits
- The state does so for its employees
Explain the following role of the state with respect to retirement benefits:
* Provision of benefits
* Sponsoring of benefits
* Provide financial incentives
* Education or require education about the importance of providing for the future
* Regulate to encourage or compel benefits by or in behalf of part of the population
* Regulate bodies providing benefits
Tax relief
Explain the following role of the state w.r.t to retirement benefits
- Provision of benefits
- Sponsoring of benefits
- Provide financial incentives
- Education or require education about the importance of providing for the future
- Regulate to encourage or compel benefits by or in behalf of part of the population
- Regulate bodies providing benefits
- State can have own educational intiative
- Can stipulate the minimum amount of information that the pension provider should disclose
Explain the following role of the state with respect to retirement benef
- Provision of benefits
- Sponsoring of benefits
- Provide financial incentives
- Education or require education about the importance of providing for the future
- Regulate to encourage or compel benefits by or in behalf of part of the population
- Regulate bodies providing benefits
- Encourage - tax breaks
- Compel - stipulation that each individual should join a benefit scheme
- stipulate min benefit
- stipulate min contribution
Explain the following role of the state w.r.t to retirement benefits
- Provision of benefits
- Sponsoring of benefits
- Provide financial incentives
- Education or require education about the importance of providing for the future
- Regulate to encourage or compel benefits by or in behalf of part of the population
- Regulate bodies providing benefits
Need to balance between:
* Encouraging providers - flexibility and freedom of action
* Protecting consumers - need for regulation and supervision
What are examples of regulatory actions
- Marketing rules
- Benefit limits
- Reporting requirements
- Investment restrictions
- Security of benefits
- Rights of beneficiaries
What fianncial instruments(securities can the state provide
- Goverment securities
- State savings plans
- Deposits into state banks
What is the role of employers in the provision of benefits
- Education of employees
- Encourage or compel employees to plan benefit provisions
- Orderly financing of benefits
- Provide a facility for the provision of benefits - a benefit scheme
Why does the employer finance benefits
Compulsion or encouragement from the state
The need to attract and retain good employees
* Attractive to employees
* As good as competitor
* Reward to loyal employees
A desire to look after employees and their dependents
Pooling of expenses and expertise
What are flexible benefit systems
Some employees already have a good provision plan in place and may require different benefits from the employer - additional salary, holidays, more days off
Single employer schemes
- Financing is shared between the employer and employee
What is a contributory single employer scheme
Both employer and employee contribute
What is a non-contributory single employer scheme
Only employer contributes
Multi-employer schemes
Set up jointly with other employers - usually from the same industry
Benefit of multi-employer scheme
- Cost effective
- Leads to a greater need for care with defined benefits schemes, or where employer becomes insolvent
Fund segregation
Holding the pension scheme’s investments seperate from the company, usually overseen by trustees
What is the role of individuals in the provision of benefits
- Financing - through encouragement or compulsion
- May be in a formal benefit scheme or non-specific
How can the state steer individuals towards certain provisions ?
- State can steer them towards certain provisions using tax relief
Other Financial institutions and organisations
- Managers (trustees) of the funds of the benefit scheme.
- Informal ones include stokvels and burial societies
- Other organisations include trade unions, charities and credit unions.
