Contributions From Employer

Contributions from the employer are generally a great deal higher than those from the employee. An employer's contribution could be from 7% to 10% of wages. In a final-earnings pension scheme the size of the employer's contributions in the future is, in fact, unpredictable. This is because, since the employee's rate of contribution is fixed, the employer himself will have to bear the balance of whatever the cost of the benefits turns out to be. Thus in a final-earnings scheme the employer's liability is open-ended. This is in direct contrast with a 'money-purchase' scheme, where the employer knows precisely what his contributions are going to be, as a proportion of total cost of wages, but where the retiring employee has to accept as benefits whatever the accumulated contributions in his name will buy.

Commutation rights

The rules of most private sector occupational pension plans allow a member on retirement to take a single tax-free capital sum in cash from the fund, forfeiting in exchange a proportion of pension. This operation is termed 'commuting' part of the pension. This option may or may not be to the member's advantage, depending on whether at that time he is able to buy with the capital sum better pension benefits in the life assurance market than he is forfeiting in the company scheme. This will largely depend on the rate of interest and of annuities prevailing at the time. In comparing pension forfeited with pension that can be bought with the commuted capital sum, it must be borne in mind that if it is the practice for the employer to increase pension payments partly or wholly to offset inflation, this might prove to be a very valuable feature in the future, and one which could not possibly be provided by any pension bought in the market.


Funded schemes

A funded pension scheme is one in which a capital fund is built up over the years from regular contributions intended to be sufficient, with its income generated, to provide enough money for the pensions as and when they fall due. Projected input to the fund is planned to equal projected outgo. That is the true meaning of funding; but the term, in pensions parlance, usually implies two other features. First, that there is a person or organisation behind the fund (usually the employer) who undertakes to provide, from time to time as recommended by the actuaries to the fund, such... see: Pensions

Personal And Business Finance 2018

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