CHP 6 Flashcards

1
Q

1.1. Defined benefit schemes

A

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.

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2
Q

1.2. Defined contribution schemes

A

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.

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3
Q
  1. Benefit providers

The key providers of benefits are:

A
  • The State
  • Employers
  • Individuals
  • Financial institutions
  • Other corporations
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4
Q
  1. The State has major role in provision of benefits, could be:
A

• Direct provision
• Encouragement of provision
• Regulation of provision
Political, economic and fiscal views of the state will determine the precise role.

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5
Q

Roles of the state will fall within the following categories:

A

• 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.

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6
Q

3.2. Roles of the State in relation to retirement benefits

A

Direct provision
Education
Regulation of other benefit providers

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7
Q

3.2. Roles of the State in relation to retirement benefits

Direct provision

A

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.

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8
Q

3.2. Roles of the State in relation to retirement benefits

Education

A

State may impose disclosure requirements on minimum levels of info.

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9
Q

3.2. Roles of the State in relation to retirement benefits

Regulation of other benefit providers

A

strike the balance between:

  1. Degree of flexibility and freedom of action – to encourage provision
  2. The need for regulation and supervision – to ensure incentives are not abused and protect benefits)
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10
Q

4.2. Roles of the employer in relation to the financing of benefits. Such financing may result from:

A
  • 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
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11
Q

4.2. Roles of the employer in relation to the financing of benefits
Developing corporate human resource strategy

A

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)

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12
Q

4.2. Roles of the employer in relation to the financing of benefits
Flexible benefit systems

A

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.

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13
Q

Choices offered by Flexible benefit systems can help meet the different needs of employees in several ways:

A
  • 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
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14
Q

Single-employer schemes

A

The financing of a scheme could be shared between employer and employees (subject to legislation)

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15
Q

Multi-employer schemes

A

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.

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16
Q

5.1. The role of individuals in benefit provision

A

Main role is financing the benefits. Could result from State or employer compulsion and/or encouragement or a personal desire for larger benefits. The provision could be through financial institutions or non-specific savings.

17
Q

5.2. Pooling resources

A

Individuals could pool resources (as an alternative to directly financing for themselves). This will help protect against some uncertainties and be more cost effective.
Trade unions, employee association or religious organization may be ways of pooling people together. Could establish retirement communities where members retire after contributing.

18
Q

5.3. Domestic property as an investment

A

Where houses are occupied by owners, this can be a source of capital in retirement or an asset against which loans can be secured.
Inheritance of a property may form part of financial planning, the timing is unsure.

19
Q
  1. Financial institution and other corporations
A

Individuals could go to financial institutions to purchase additional benefits, these institutions may actively point out short comings in individual financial planning and sell these benefits.