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(i) Outline the benefits that can be provided to members of a defined contribution pension scheme. [4] (ii) Compare the financial risks of a defined contribution pension scheme with those of a defined benefit pension scheme for: (a) a member and ( b ) an employer. [7] A company sponsoring a non-contributory defined benefit pension scheme has decided to amend the scheme to provide benefits on a defined contribution basis for future service. The benefits payable for service prior to the date of amendment are set out below: Normal Pension Age (NPA) 60 Accrual rate 1/60ths of Final Pensionable Salary for each year of pensionable service Commutation at NPA Maximum of 20% of member's pension with each El p.a. of pension providing $12 of cash Final Pensionable Salary Average of basic pay at 1 April for the three year period prior to leaving Pension increases in payment 3% p.a. Spouse's pension on death before NPA 1/3" of basic pay on 1 April prior to death Lump sum on death before NPA 5 times basic pay on 1 April prior to death Spouse's pension on death after NPA 50% of member's pension at date of death An extract of the minutes of the company board meeting where the decision was taken is as follows: "The company's objective is to reduce the financial risks associated with the current pension scheme, and to offer a replacement scheme having the same expected long term cost for future service." (iii) Calculate the rate (as a percentage of basic pay) at which the company will need to contribute to the defined contribution scheme in order to try to achieve this objective. State the assumptions you have made and show your workings. [8] (iv) Discuss why the cost of the new pension benefits might differ from the cost of the current scheme, assuming that the company pays contributions at the rate calculated in part (iii). [6] [Total 25]A company currently provides a defined benefit pension scheme for its employees. The benefits provided by the scheme are a pension equal to 1/60th of final salary for each year of service, plus a death benefit lump sum of two times salary. The company is proposing to replace the current scheme with a flexible benefit scheme. (i) Explain what is meant by a flexible benefit scheme. [1] (ii) List the benefits that could be included in the proposed scheme. [5] The company decides to set up a flexible benefit scheme, offering a range of benefits to employees. The scheme has been designed such that the overall benefit provision will have the same expected cost to the employer as the current scheme. (iii) Explain why the employer might want to provide a core level of certain benefits under the flexible benefit scheme. [2] (iv) Set out the advantages and disadvantages of this new scheme to: (a) the employer; and (b) the employees. [8]
