Final Salary Schemes.pptVIP

Final Salary Schemes l They provide benefits according to a fixed formula. The benefits are based on salary at the date of retirement. Most scheme guarantee payment of a fraction of the final salary, usually1/60th or 1/80th for each year of service completed by the employee. k Contracted-out: choosing an alternative contract to SERPS/S2P Defined-benefit: the pension are based on a calculation of an amount (usually salary +bonuses) that is known beforehand with relative certainty l Salary-related: the scheme benefit is connected to the salary earned Final-salary: the defined benefit will be based on the final pre-retirement salary from the individual’s employment s Objective of a pension scheme is to provide a level of income based on earned income shortly before, or at, retirement Both the employer and the employee will make contributions into this type of pension scheme m It may not be the final salary that determines the amount of the pension. It may be the average of the last three years, or it could be the best from the last ten years’ salary Benefits depend on final pensionable pay, not directly depend on investment returns or annuity rate F The employer contributes costs in excess of the employee contribution the employer shoulders all of the risk Members who leave early often suffer a loss as benefits are linked to prices rather earnings. Employers guarantee the level of payment that will be received by the employee at retirement. Five major problems The level of future salary increases is unknown The return that the pension scheme will be able to earn mainly from the stock market is uncertain The annuity rate that will apply at the retirement date is also unknown Changes in legislation Retirement may not happen at the expected time There is a benefit that will be expected at retirement based on the length of service The benefit will depend on projected salary increases, the age of retirement and the annuity rate prevailing at the actual time of