Defined benefit schemes

Defined benefit schemes are the standard schemes of this century. Contribu­tions are made by employees and (usually) by their employees, who earn themselves a benefit (pension, of which part can be taken in a lump sum) of either ¹/₆₀ or ¹/₈₀ of their final salary (or the average of the last three years' salaries) for every year in which contributions are made. Thus, 40 years' service gives a pension of ²/₃ or ¹/₂, of final salary if the benefit is ¹/₆₀ or ¹/₈₀ respectively. The assumptions are that employees stay in their jobs for a long time and that salary changes are upwards. However, it is now a fact that job changes are more frequent, so transfers have to be made between funds. Second, the 'upward salary' assumption makes it hard for older workers to move to part-time or less remunerative work with their employers as they approach retirement age.

A severe problem can arise with these schemes if there is a period of substan­tial inflation (as there was) because the earlier contributions are unable to finance the higher final salaries caused by the inflation. As a result, [he em­ployers are required by the trustees of the schemes to make up the contributions and this can be a drain on their profits and cash flows. Moreover, if inflation then slows (as it did), the schemes may become 'over-funded' instead of 'un­derfunded', so that a 'pensions holiday' is declared. In some funds, the over-funding has allowed employees, as well as employers, to pay lower con­tribution rates. These 'defined benefit' schemes have been virtually universal in the largest companies and typically are run by trustees advised by mer­chant banks in their investment decisions. A more common term for them is 'final salary' pensions.

Дата добавления: 2015-07-20