Chapter 5: Benefits overview and providers of benefits Flashcards
What is a defined benefit scheme?
1> The benefit is defined in terms of a set of rules defined independently of contributions payable
2> For example as a percentage of final salary
3> The benefit is not directly related to contributions paid or investment returns
4> The scheme may be funded or unfunded
What is a defined contribution scheme?
1> The benefits depend directly on the contributions paid in respect of that member
2> Increased by investment returns (earned net of charges).
What is a defined ambition scheme?
1> Risk are shared between the different parties involved
2> Such as scheme members, employers, insurers and investment businesses
Who are the 5 main providers of benefits?
1> The state
2> Employers or group of employers
3> Individuals
4> Financial institutions
5> Other organisations
What are the key roles of the state in benefit provision? (6)
1> Provide benefits to some or all of the population
2> Sponsor the provision of such benefits
3> Provide financial incentives=> through tax system
i. For other providers to establish appropriate provision or
ii. Subsidise the cost of such provisions to consumers
4> Educate or require education about the importance of providing for the future
5> Regulate to encourage or compel benefit provision by or on behalf of some of the population
6> Regulate bodies providing benefits and bodies with custody of funds=> ensure security of benefit promises made
What benefits may the state provide?
✓ Retirement
✓ Ill health
✓ Death
✓ Unemployment
What are the possible role of employers in relation to benefit provision?
1> Educating, and either encouraging or compelling employees to plan benefit provision.
2> Financing of benefits for employees, in an orderly manner
3> Providing a scheme for the provision of benefits
Why do employers finance benefits for employees? (4)
1> Compulsion or encouragement from the state
2> Attract and retain good quality employees
3> Desire to look after employees and their dependents financially beyond the level of the state
4> Pool expenses and expertise
What is a multi-employer scheme and what is its key advantage and its key disadvantage?
✓ Benefit scheme set up jointly with other employers
✓ Often from the same industry
+> It makes provisions more cost effective
-> More care must be taken over allocating the liability for funding DBs
-> Particularly in the event of the insolvency of one of the sponsors
i. Problem reduced by fund segregation
What is a flexible benefit system?
1> Employees are offered options to choose between different benefits
2>Which the employee can buy (reducing cash pay) OR
3> Sell (increase cash pay)
What are the roles of the individual in relation to benefit provision?
1> Finance benefit=> schemes provided by state, employer insurance company.
2> Individuals may use savings or domestic property=> to finance benefits
3> Individuals may be incentivised to finance benefits by:
i. Employers agreeing to match contributions up to a certain limit OR
ii. Government tax incentives
How can domestic property be used as a source of benefits for an individual?
1> Sell the house
2> Loans can be secured on the accumulated equity of the house
3> Anticipated capital sum=> available on inheritance of a domestic property
What role do financial institutions play in the provision of benefits?
1> provide Benefit schemes and insurance products
2> Educate consumers on the importance of making benefit provisions
3> Micro-insurance products are used=> simple products with low premium
What other organisations advice individuals on benefits provision? (3)
✓ Trade unions
✓ Credit unions
✓ Charities
