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Benefits overview and providers of benefits (Key roles of the State in…
Benefits overview and providers of benefits
Types of pension schemes
DB scheme
The benefit defined in terms of a set of rules, e.g. a % of final salary for each year worked.
The benefit is not directly related to the contributions paid in or the investment returns earned.
The scheme may be funded or unfunded.
DC scheme
Benefit depends directly on the contributions paid in respect of that member
increased by the investment returns (net of charges) earned on those contributions
Defined ambition scheme
Risks are shared between the different parties involved
e.g. members, employers, insurers and investment businesses
Flexible benefits system
Employees are offered the option to choose between different benefits (e.g. extra holiday, dental care, child care), which the employee can 'buy' (by reducing cash pay) or 'sell' (to increase cash pay).
Main providers of benefits
The State
State provided benefits
retirement, ill-health, death and unemployment
May also provide financial instruments such as national debt securities, State-sponsored savings plans and the facility to deposit money in State (or local authority) bank accounts
Financial institutions
Individuals
Employers or groups of employers
Other organisations
Key roles of the State in relation to benefit provision
Provide benefits to some or all of the population
Sponsor the provision of such benefits, perhaps by providing appropriate financial instruments
Provide financial incentives usually through the tax system, either for other providers to establish appropriate provision, or to subsidise the cost of such provision 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, in an attempt to ensure security for promises made, or expectations created.
Roles of the employer 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
Why employers finance benefits for employees
Compulsion or encouragement from the State
A desire to attract and retain good quality employees
A desire to look after employees and their dependants financially beyond the level provided by the State
To pool expenses and expertise
Multi-employer schemes
A benefits scheme set up jointly with other employers,often from the same industry.
it makes provision more cost effective.
More care must be taken over allocating the liability for funding benefits, particularly in the event of the insolvency of one of the sponsors. (This problem can be reduced by fund segregation.)
Role of the individual in benefit provision
Main role to finance benefits through, for example, a scheme provided by the State, an employer, an insurance company or other financial organisation
Alternatives include individual savings or domestic property, financial support from families or local community schemes.
Individuals might be incentivised through tax advantages or ERs matching EE conts up to certain limits
Domestic property as a source of benefits
The home could be sold
Loans could be secured on the accumulated equity in the home
A capital sum may be available on inheritance of a domestic property
The role of financial institutions in benefit provision
Provide benefit schemes and insurance products
They mat also educate consumers on the importance of making benefit provision
Increasingly microinsurance approaches are used (very simple products with low premiums) to provide benefits to lower-income individuals otherwise not catered for by traditional insurance products
Other organisations providing benefits
Trade unions
Credit unions
Charities