Chapter 6: 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.
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, increase by the investment return earned on those contributions.
Defined ambition
A scheme where risks are shared between the different parties involved, ex. scheme members, employers, insurers and investment businesses.
6 providers of benefits
- the state
- employers
- individuals
- financial institutions
- other corporations
4 Major roles played by the State
- Direct provision of benefits, eg on retirement, death, ill health
- Education on importance of provision
- Regulation to encourage or compel benefit provision
- Regulation of benefit providers
4 Reasons for Employers sponsoring benefit provision
- compulsion/encouragement from the state
- paternalism
- to meet business objectives, eg attract and retain good staff
- to pool expenses and expertise
2 Reasons for individuals to finance benefit provision
- compulsion/encouragement by the state/employers
- individual’s personal preferences
4 Key features of pension contracts
- means of providing income in retirement for an individual and possibly his/her dependents
- may provide other benefits, ex lump sum payment to dependents if individual dies
- may have options to change the form/timing of the benefit, ex. 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 substatial 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
- defined ambition schemes
Cash balance scheme
A defined lump sum is provided at retirement as opposed to a defined pension through retirement
