Defined benefit scheme
- Scheme rules define benefits independently of payable contributions.
- Benefits are not directly related to the investments of the scheme. Normally linked to final salary.
- The scheme may be funded/unfunded.
Defined Contribution Scheme
- The 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.
A scheme where risks are shared between the different parties involved, ex. scheme members, employers, insurers and investment businesses.
4 providers of benefits
- the state
- financial institutions (instance, banks, mutual funds and investment companies)
- other organisations (trade union, employee association, religious organisations)
4 Major roles played by the State
- Direct provision of benefits, eg on retirement, death, ill health
- Education on importance of provision
- Regulation to encourage or compel benefit provision
- Regulation of benefit providers
4 Reasons for Employers sponsoring benefit provision
- compulsion/encouragement from the state
- to meet business objectives, eg attract and retain good staff
- to pool expenses and expertise
2 Reasons for individuals to finance benefit provision
- compulsion/encouragement by the state/employers
- individual’s personal preferences
4 Key features of pension contracts
- means of providing income in retirement for an individual and possibly his/her dependents
- may provide other benefits, ex lump sum payment to dependents if an individual dies
- may have options to change the form/timing of the benefit, ex. an option at retirement to exchange a proportion of the pension payments for a cash payment
- long-term arrangements
Offered by employers to their employees, where the employer usually pays a substantial percentage of the cost of providing the benefits.
Personal pension plans/arrangements
Purchased from an insurance company by an individual
Active pension scheme member
Members still earning future pension benefits over time
Deferred pension scheme members
Members who have stopped earning any future benefits but who have an existing benefit entitlement who used to work for the sponsoring company but has now left to work at another company.
3 Main types of pension schemes
- defined benefit schemes
- defined contribution schemes
- defined ambition schemes
Cash balance scheme
A defined lump sum is provided at retirement as opposed to a defined pension through retirement
3 ways the state can provide financial instruments for future provision
- direct investment in National Debt (government securities)
- State-sponsored savings plans (National Savings in the UK)
- deposits with the State bank, or local authorities.
means holding the pension scheme’s investments separate from the company, usually overseen by trustees.