Chapter 5 Flashcards
(13 cards)
Types of schemes (3) :
Defined benefit:
* The scheme rules define the benefits independently of the contributions payable, and benefits are not directly related to the investments of the scheme
* May or may not be funded
* Benefits will be defined by a set formula, and might be linked to, for
example:
▪ How long the member works for the sponsoring company.
▪ The member’s salary at retirement.
* risk is primarily with the employer
Defined Contribution:
* 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, increased by the investment return earned on those contributions.
* risk lies with the member
-investment performance poor=each member’s fund is lower
-longevity risk
-expense risk lies with the employer or the member depending on if the expenses are met by the employer or charged form the accumulated fund
Hybrid:
* Scheme where risks are shared between the different parties involved e.g. scheme members, employers, insurers and investment businesses
The different benefit sponsors (4) :
- The state
- Employers
- Individuals
- financial institutions (insurance companies, banks, mutual funds, investment companies)
The roles of the state(5)
- Direct provision of benefits
– need to means-test (cant pass off to individuals as they may not earn enough or employers as this does not include the self employed or unemployed) - cost of provisions is met by high taxation and government borrowing
-In reality, the tax paying population are the providers of the benefits.
-Old age pension, unemployment (social grants), disability grants - Encouragement of provision of benefits (encouraging provisions through tax relief on contributions that do not exceed 27.5% of gross income)
-Tax reliefs work well in South Africa because of the progressive tax system
-they can make it compulsory to contribute to a benefit fund (compels through law) - Education about importance of providing for the future
- Regulation of provision from other providers
-legislates benefit fund laws
-monitors and enforces the legal framework
-enables trust in regulated providers
-regulates the investment markets - Provides suitable instruments such as index-linked gilts
Why would an employer sponsor benefit provisions?
- Encouragement from the state (tax incentives)
- Attraction and retention of good staff
- Desire to look after employees and their dependents
- To pool expenses and expertise
-A large corporation negotiates a group medical scheme for all its staff, reducing the cost per person compared to each employee buying their own medical cover.
How do employers sponsor benefit provisions (4):
- Occupational schemes
- Contributory scheme – financing of the scheme is shared between the employer and employee
- Formal employer-sponsored scheme – do not need to be sponsored by a single employer (industry-wide schemes-makes provision cost effective)
- Flexible benefit system – employees can trade in some of their existing benefits for other financially equivalent benefits
Why would an individual sponsor benefit provisions?
- Encouragement from the state or employers
- Individual’s personal preferences
How do individuals sponsor benefit provisions (2)?
- Can be formally structured savings plans, generated by the state, employers or other institutions
- May use domestic property as an investment to meet retirement needs or they may benefit from property through inheriting it
How do financial institutions and other corporations sponsor benefit provisions?
- Provided through employer-run schemes or directly to individuals
- Proactive in highlighting the need for individuals to make provisions
- Informal benefit providers: burial society and stokvels
- Trade unions, credit unions and charities can also advise individuals on provisions
What is the difference between a sponsor and provider?
- Sponsor – person who pays (employer, state, individual (you or family members), affinity groups – group that people have chosen to identify with as they have similar interests)
- Pay the costs (costs of setting up the fund, paying out the benefit,)
- Finance the benefits
- Could be called the funder
- Can also be a provider
- Provider – people that offers the product (state, employer sponsored benefit funds, other benefit funds(trade unions, churches), financial institutions ( assurance companies))
- (legally responsible for the payment of the benefits)
The state might regulate the cost and level of life assurance benefits by: (14)
-limiting the premiums charged
-restricting distribution channels and commission payable
-setting minimum and maximum amount of cover
-restricting information that can be used for underwriting
-requiring disclosure of certain information to the policyholder
-restrictions on investments held
-requiring life insurers to demonstrate solvency regularly
-preventing monopolies and encouraging competition
-ensuring staff and sale people are fit
-tax treatment of benefits
-requiring life insurers to pay levies into a compensation scheme
-setting maximum charges
-setting minimum and maximum retirement age
-determining the method and assumptions used in valuing
Types of pension scheme members: (3)
Active members
-These are employees who are currently working and are still building up pension benefits.
Deferred members
-These are people who have left the employer or stopped contributing, but still have a pension benefit waiting for them in the future
Current pensioners
-These are members who are already receiving their pension benefits – usually after reaching retirement age
Advantages of running industry-wide schemes (multi-employer schemes)
-economies of scale and cost savings in investment and administration
-Increased mobility of the workforce between participating employers
-A wider choice of benefits arising from large schemes.
-A sense of identity for employees within the industry
