Prepared by SITI AYUNI HJ MAT
Defined Benefit
Promise by the employer to provide a Pension based on the employee’s final salary and the number of years pensionable service. Both pension promises and contribution rates can be radically changed any time prior to retirement and/or the scheme closed to new contributions and/or members. In the event of winding-up, members are entitled to the higher of: The Pension Protection Fund guarantee (90 percent of their promised pension entitlement); and, Their share of the net realisable value of the pension fund and any other guarantees or assets pledged by the employer as collateral. Investment choices are the responsibility of the Pension Fund Trustees Employer specific risk plus the Pension fund’s Investment Portfolio Market Risk (β) Highly dependent upon Trustee skills and incentives. Employer -pension fund (trustees, members and tax payers) conflicts of interest. Conflicts between active members (current employees), deferred members (those no longer employees/contributors and pensioners). Requires costly regulation by the Pensions Regulator, insurance via the Pension Protection Fund and diligent trustees to protect member interests.
Defined Contribution
Pension based on the value of accumulated pension savings and the annuity rates prevailing at retirement. The member unambiguously owns the accumulated pension pot bought with their contributions, i.e., they are entitled to receive its full market value upon either retirement or death prior to retirement Wide range of asset classes/active-passive investment choices available for the member to choose from. Investment Portfolio Market Risk (β) Minimal agency issues beyond ensuring that members receive adequate information and choices regarding the investment risks and fee levels associated with their fund choices. Ensuring that the default fund has low costs and high risk diversification.
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