CHP 6 Flashcards
1.1. Defined benefit schemes
Def: a benefit scheme where the scheme rules define the benefits independently of the contributions payable. Benefits are not directly related of the investments of the scheme. The scheme could be funded or unfunded.
1.2. Defined contribution schemes
The benefits depend on the contributions made to the scheme. The benefits will increase by investment return earned.
Hybrid schemes - offers the best of both but could be complex to administer. E.g. could have a min guar on DC fund.
- Benefit providers
The key providers of benefits are:
- The State
- Employers
- Individuals
- Financial institutions
- Other corporations
- The State has major role in provision of benefits, could be:
• Direct provision
• Encouragement of provision
• Regulation of provision
Political, economic and fiscal views of the state will determine the precise role.
Roles of the state will fall within the following categories:
• Provide benefits to some or all of the population
• Educate or require education about the importance of providing for the future
• Regulate to encourage or compel benefit provision by or on behalf of some of the population
• Regulate bodies that provide benefits and has custody of funds to ensure security for promises and expectations
The State must also ensure consistency across roles.
3.2. Roles of the State in relation to retirement benefits
Direct provision
Education
Regulation of other benefit providers
3.2. Roles of the State in relation to retirement benefits
Direct provision
Where life expectancy is high (beyond retirement age), retirement benefits are of high financial significance (even though individuals do not recognize this). State plays a large role ensuring the population receives income.
3.2. Roles of the State in relation to retirement benefits
Education
State may impose disclosure requirements on minimum levels of info.
3.2. Roles of the State in relation to retirement benefits
Regulation of other benefit providers
strike the balance between:
- Degree of flexibility and freedom of action – to encourage provision
- The need for regulation and supervision – to ensure incentives are not abused and protect benefits)
4.2. Roles of the employer in relation to the financing of benefits. Such financing may result from:
- Compulsion or encouragement from the State (e.g. tax incentives)
- Paternalistic desire to look after employees financially beyond State benefits (main driving force in UK)
- Desire to attract and retain good staff
- Pooling of expertise and expenses
4.2. Roles of the employer in relation to the financing of benefits
Developing corporate human resource strategy
When considering benefits to be provided to staff, a company would identify the drivers of its profitability.
Employees can be made aware of the drivers and be rewarded for their contribution to them.
Contract design should be tailored to the workforce or subgroups of the workforce (e.g. labourer and exec)
4.2. Roles of the employer in relation to the financing of benefits
Flexible benefit systems
Useful when it’s inappropriate to provide all employees with the same benefits. Under this, employees can select the package suitable and it will be deducted from salary. (e.g. death cover, disability, leave etc.)
Flexible benefit systems recognize that employees need time to adjust packages every year and allows for this.
Choices offered by Flexible benefit systems can help meet the different needs of employees in several ways:
- Allow them to select from different benefit options
- Different groups in the workforce can select different benefits (e.g. married, old, young)
- Packages can change over time with changing circumstances
- New benefits can be offered at little or no cost to the employer
Single-employer schemes
The financing of a scheme could be shared between employer and employees (subject to legislation)
Multi-employer schemes
Different employers can set up a scheme together, often within the same industry. This makes it more cost effective.
The use of this type of scheme leads to the a need for greater care in allocating liability for funding defined benefits, particularly in the case of insolvency of one of the sponsors. Fund segregation is usually important in reducing this.