Week 1.1: Pensions

Question 1

What are pensions?

Answer 1

Regular payments made by individuals who surpassed retirement age. State pension is normally not enough to survive so you will need employee pension too.

Question 2

Private vs Individual pension plan?

Answer 2

Private: Part of employee benefits. Both employees and employers contribute to plan.

Individual: Personal investments made by individuals s savings for the future.

Question 3

What are the 2 categories of pension plans?

Answer 3

• Defined contribution plans
• Defined benefit plans

Question 4

What is a defined contribution plan?

Answer 4

• Both employers and employee contribute a specific amount each month in terms of percentage on salary.
• The is invested in an asset such as a bond or share of the company.
• The amount you put in is not the amount you get at pension, value may change- risky for employee.

Question 5

How do you account for a defined contribution?

Answer 5

The employees contribution is recognised as an expense at P&L.
Th employees contribution is deducted from salary, so no additional cost to employer.

Question 6

what is Defined benefit plans?

Answer 6

Benefits are set in advance. There will be a target benefit amount promised in employee contract. The amount of pension each month can vary to meet the end pension target.

This may be complex as you have to estimate how long they’ll work, how long they will live for after pension.
IF there is a shortfall, employee must pay- employer bears risk.

Question 7

What are the employer risks for defined benfit?

Answer 7

(1) Actuarial risk- demographic nature. risk employees will live longer then expected.

(2) Investment risk-
Economic nature- inflation, investement return.

Question 8

How do you account for defined benefit?

Answer 8

Unit credit method- to estimate the cost to the entity of the benefits.

They use discount rates to determine present value.

Question 9

What is the pension crisis and what caused it?

Answer 9

The shortfall between the mount needed to fun employee post-retirement and the value of the investment at retirement date.

Due to:
- Increased life expectancy
- Low interest rates
- Poor returns on investment due to financial crash.

Question 10

How did companies react to the pension crisis?

Answer 10

They introduced more defined contribution plans and phased out defined benefit schemes. This shifts risk to employees based on value of investment.

Question 11

What role did discount rate pay in the pension crisis?

Answer 11

Controversy over what discount rate to use. it produced illusory deficits which resulted in poor decision making.

Demands for bonds increased which drove down yields.