Chapter 6: Providers of Benefits

Question 1

Defined benefit scheme

Answer 1

• 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.

Question 2

Defined Contribution Scheme

Answer 2

• 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.

Question 3

Hybrid Scheme

Answer 3

A scheme where risks are shared between the different parties involved, ex. scheme members, employers, insurers and investment businesses.

Question 4

5 providers of benefits

Answer 4

• the state
• employers
• individuals
• financial institutions
• other organizations e.g. trade unions, credit unions and charities

Question 5

6 Major roles played by the State

Answer 5

PROVISIONS

• DIRECT provision of benefits, eg on retirement, death, ill health
• SPONSORING of the provision of benefits
• Provision of financial INCENTIVES
• 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.

Question 6

4 Reasons for Employers sponsoring benefit provision

Answer 6

• compulsion/encouragement from the state
• paternalism - look after employees
• to meet business objectives, eg attract and retain good staff
• to pool expenses and expertise

Question 7

2 Reasons for individuals to finance benefit provision

Answer 7

• compulsion/encouragement by the state/employers

- individual’s personal preferences - want more cover than provided by the state

Question 8

4 Key features of pension contracts

Answer 8

• 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

Question 9

Occupational schemes

Answer 9

Offered by employers to their employees, where the employer usually pays a substantial percentage of the cost of providing the benefits.

Question 10

Personal pension plans / arrangements

Answer 10

Purchased from an insurance company by an individual

Question 11

Active pension scheme member

Answer 11

Members still earning future pension benefits over time

Question 12

Deferred pension scheme members

Answer 12

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.

Question 13

Current pensioners

Answer 13

Members who are receiving their benefit entitlement

Question 14

3 Main types of pension schemes

Answer 14

• defined benefit schemes
• defined contribution schemes
• hybrid schemes

Question 15

Cash balance scheme

Answer 15

A defined lump sum is provided at retirement as opposed to a defined pension through retirement

Question 16

“Other organizations” that provide benefits

Answer 16

• trade unions
• employee associations
• religious organisations

Question 17

3 ways the state can provide financial instruments for future provision

Answer 17

• direct investment in National Debt (government securities)
• State-sponsored savings plans (National Savings in the UK)
• deposits with the State bank, or local authorities.

Question 18

Fund segregation

Answer 18

means holding the pension scheme’s investments separate from the company, usually overseen by trustees.

Question 19

Possible ways the State could regulate personal pensions purchased by individuals from insurance companies?

Answer 19

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.

Question 20

The State might regulate the cost and level of life assurance benefits by:

Answer 20

PRODUCT 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 be 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)