5. Benefits overview and providers of benefits Flashcards
(15 cards)
What is a defined benefit scheme?
- The benefit is defined in terms of a set of rules
- For example as a percentage of final salary
- The benefit is not directly related to contributions paid or investment returns
- The scheme may be funded or unfunded
What is a defined contribution scheme?
- The benefits depend directly on the contributions paid in respect of that member
- Increased by investment returns (earned net of charges).
What is a Hybrid scheme?
- Risk are shared between the different parties involved
- Such as scheme members, employers, insurers and investment businesses
Who are the 5 main providers of benefits?
- The state
- Employers or group of employers
- Individuals
- Financial institutions
- Other organisations
What are the key roles of the state in benefit provision?
- Provide benefits to some or all of the population
- Sponsor the provision of such benefits
- Provide financial incentives=> through tax system
- OR Subsidise the cost of such provisions to consumers
- 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 providing benefits and bodies with custody of funds=> ensure security of benefit promises made
What benefits may the state provide?
- Retirement
- Ill health
- Death
- Unemployment
- Financial instruments - National debt securities, state-sponsored savings, deposits with state bank
What are the possible role of employers in relation to benefit provision?
- Educating, and either encouraging or compelling employees to plan benefit provision.
- Financing of benefits for employees, in an orderly manner
- Providing a facility (scheme) for the provision of benefits
List four reasons why do employers finance benefits for employees?
- Compulsion or encouragement from the state
- Attract and retain good quality employees
- Desire to look after employees and their dependents financially beyond the level of the state
- Pool expenses and expertise
What is a multi-employer scheme and what is its key advantage and its key disadvantage?
- Benefit scheme set up jointly with other employers
- Often from the same industry
- +It makes provisions more cost effective
- -More care must be taken over allocating the liability for funding DBs
- Particularly in the event of the insolvency of one of the sponsors
- Problem reduced by fund segregation
What is a flexible benefit system?
- Employees are offered options to choose between different benefits (e.g. extra holiday, dental care, child care)
- Which the employee can buy (reducing cash pay) OR
- Sell (increase cash pay)
What are the roles of the individual in relation to benefit provision?
- Finance benefit=> through schemes provided by state, employer insurance company.
- Individuals may use savings or domestic property=> to finance benefits
- Individuals may be incentivised to finance benefits by:
- Employers agreeing to match contributions up to a certain limit
- OR ii. Government tax incentives
Three examples of how domestic property can be used as a source of benefits for an individual?
- Home could be sold
- Loans secured on the accumulated equity of the house
- A capital sum=> available on inheritance of a domestic property
What role do financial institutions play in the provision of benefits?
- Provide benefit schemes and insurance products
- Educate consumers on the importance of making benefit provisions
- Micro-insurance products are used=> simple products with low premium
Give three examples of other organisations provide benefits?
- Trade unions
- Credit unions
- Charities
Who provides pension?
- State
- Private sector:
- Occupational schemes - Offered by employer to employees
- Personal pension plan or arrangements - Purchased by individuals from long-term insurers
