Chapter 5 - Benefits Overview & Providers of Benefits Flashcards
Defined benefit scheme
- Scheme rules define benefits independently of payable contributions.
- Benefits are not directly related to the investments of the scheme. Normally linked to final salary and no. of years worked
- Scheme may be funded/unfunded.
Defined Contribution Scheme
- 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.
Hybrid Scheme
A scheme where risks are shared between the different parties involved, ex. scheme members, employers, insurers and investment businesses.
5 providers of benefits
- the state
- employers
- individuals
- financial institutions
- other organizations e.g. trade unions, credit unions and charities
6 Major roles played by the State (in the provision of benefits)
PROVISIONS
- DIRECT provision of benefits, eg on retirement, death, ill health.
- SPONSORING of the provision of benefits.
- Providing financial INCENTIVES for provisioning.
- EDUCATION on importance of provision.
REGULATION
- Regulation to encourage or compel benefit provision
- Regulation of benefit providers
**The State can also provide financial instruments e.g. the issue of bills and bonds, savings plans, deposits with the State Bank.
(i) 4 Reasons for Employers sponsoring benefit provision
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(ii) List 3 possible roles of employers in relation to benefit provision.
(i)
1. Compulsion or encouragement from the State
- A desire to attract and retain good quality staff
- Paternalism: a desire to look after employees and their dependents financially beyond the level provided by the State.
- To pool expenses and expertise
(ii)
1. Educating, and either encouraging or compelling employees to plan benefit provision
- Financing of benefits for employees, in an orderly manner
- Providing a facility (scheme) for the provision of benefits
(i) 2 Reasons for individuals to finance benefit provision
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(ii) What are the roles of the individual in relation to benefit provision?
(i)
- compulsion/encouragement by the state/employers
- individual’s personal preferences
(ii)
The main role is to FINANCE BENEFITS through, for example, a scheme provided by the State, an employer, an insurance company or other financial organization.
Alternatively, individuals may use individual savings or domestic property to finance benefits, or by way of financial support from families or local community schemes.
Individuals might be INCENTIVISED to finance benefits through tax advantages or by employers matching employee contributions up to certain limits.
4 Key features of pension contracts
- means of providing INCOME in RETIREMENT for an individual and possibly his/her dependents
- may provide PRE-RETIREMENT benefits eg. lump sum payment to dependents if member dies or becomes critically ill
- may have OPTIONS to change the form/timing of the benefit eg. an option at retirement to exchange a proportion of the pension payments for a cash payment
- LONG-TERM arrangements
Occupational schemes
Offered by employers to their employees, where the employer usually pays a substantial percentage of the cost of providing the benefits.
Personal pension plans / arrangements
Purchased from an insurance company by an individual
Active pension scheme member
Members still earning future pension benefits over time
Deferred pension scheme members
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.
Current pensioners
Members who are receiving their benefit entitlement
3 Main types of pension schemes
- defined benefit schemes
- defined contribution schemes
- hybrid schemes
Cash balance scheme
A defined lump sum is provided at retirement as opposed to a defined pension through retirement
3 “Other organizations” that provide benefits
- trade unions
- employee associations
- religious organisations
3 ways the state can provide financial instruments for future provision
- direct investment in National Debt (government securities)
- State-sponsored savings plans (National Savings in the UK)
- deposits with the State bank, or local authorities.
Fund segregation
means holding the pension scheme’s investments separate from the company, usually overseen by trustees.
Possible ways the State could regulate personal pensions purchased by individuals from insurance companies?
The State might regulate the following areas of personal pensions provision:
SCHEME => MEMBER
- Setting minimum and/or maximum CONTRIBUTION rates
- Setting maximum CHARGES
- Setting a minimum and/or maximum AMOUNT of BENEFIT
- Limiting the TYPES of ANNUITIES purchased
- Requiring those providing advice to have appropriate QUALIFICATIONS
- Setting a minimum and/or maximum RETIREMENT AGE
INTERMEDIARIES
- Setting or limiting COMMISSION terms directly
- Limiting INVESTMENT options
- Setting terms for contracting out of the State provision (if that is allowed)
BUSINESS ENVIRONMENT
- Preventing monopolies and encouraging COMPETITION
- Providing TAX INCENTIVES or taxing contributions, investments and benefits
- Determining the METHOD and ASSUMPTIONS to use in valuing / projecting the pension benefits.
The State might regulate the cost and level of life assurance benefits by:
RODUCT FACTORS
- Limiting the premiums that can be charged
- Restricting distribution channels and commission payable
- Setting a minimum and/or maximum amount of cover
BEFORE POINT of SALE
- Restrictions on the information that can be used for underwriting
- Requiring that certain information is disclosed to the policyholder on sale
BUSINESS ENVIRONMENT
- Preventing monopolies and encouraging competition
- Requiring that staff and sales people are ‘fit and proper’
- Restricting investments held
- Requiring life insurers to demonstrate solvency on a regular basis
- Taxing benefits requiring life insurers to pay levies into a compensation scheme (which compensates the policyholder should a particular insurer fail)
What is a multi - employer scheme and what is its key advantage and disadvantage?
A multi-employer scheme is a benefits scheme set up jointly with other employers, often from the same industry.
Advantage: It makes provision more cost effective.
Disadvantage: More care must be taken over allocating the liability for funding DBs, particularly in the event of the insolvency of one of the sponsors.
Describe a flexible benefits system
Under a flexible benefits system, employees are offered the option to choose between benefits, which the employee can ‘buy’ or ‘sell’
They are given a notional amount which they can spend
Give 3 examples of how domestic property can be used as a source of benefits for an individual
- The home could be sold
- Loans can be secured on the accumulated equity in the home
- A capital sum may be available on inheritance of a domestic property
