CHP 6

Question 1

1.1. Defined benefit schemes

Answer 1

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.

Question 2

1.2. Defined contribution schemes

Answer 2

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.

Question 3

2. Benefit providers

The key providers of benefits are:

Answer 3

• The State
• Employers
• Individuals
• Financial institutions
• Other corporations

Question 4

3. The State has major role in provision of benefits, could be:

Answer 4

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

Question 5

Roles of the state will fall within the following categories:

Answer 5

• 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.

Question 6

3.2. Roles of the State in relation to retirement benefits

Answer 6

Direct provision
Education
Regulation of other benefit providers

Question 7

3.2. Roles of the State in relation to retirement benefits

Direct provision

Answer 7

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.

Question 8

3.2. Roles of the State in relation to retirement benefits

Education

Answer 8

State may impose disclosure requirements on minimum levels of info.

Question 9

3.2. Roles of the State in relation to retirement benefits

Regulation of other benefit providers

Answer 9

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)

Question 10

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

Answer 10

• 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

Question 11

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

Answer 11

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)

Question 12

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

Answer 12

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.

Question 13

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

Answer 13

• 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

Question 14

Single-employer schemes

Answer 14

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

Question 15

Multi-employer schemes

Answer 15

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.

Question 16

5.1. The role of individuals in benefit provision

Answer 16

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.

Question 17

5.2. Pooling resources

Answer 17

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.

Question 18

5.3. Domestic property as an investment

Answer 18

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.

Question 19

6. Financial institution and other corporations

Answer 19

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.