Assignment 5: Pension Reforms & Reward Management

Pension Reforms & Reward Management

Pensions

Pension plans are offered to retired employees in order to provide benefits. Pension plans vary in their features and are designed by organizations according to their employee's needs. Pension plans are considered as a vital component of the total compensation paid by organizations/ employers. Better devised pension plans tend to improve the staff retention rate of any organization (Taylor et. al, 2003).

Pay-as-you-go Pension Schemes

According to a research conducted by Loretto et. al (2000), found out that Pension schemes offered by organizations were ranked fifth among the factors that attracted employees to their jobs. Various pension schemes are offered by employers today i.e. unfunded or (Pay-as-you-go) Pension schemes. It is believed to be inefficient to draw money from the economy in pension contributions for everyone, then bearing the costs of investing and administering them to pay out pensions. Hence, it becomes less costly and easier to leave the money in the economy and only draw when needed to pay entitlements.

Another major reason for the lack of attraction to the Pension plans continues to be the high level of employee ignorance on the available Pension schemes. Similar ignorance on Pension schemes was found among Canadian workers (Luchak & Gunderson, 2000). In England, unfunded pensions are meant to be paid by the employer after they retire. (Byrne et. al, 2006). It allows employees to utilize the unfunded pension amounts. On the other hand, funded schemes include periodic payments that accumulate and are reimbursed after retirement.

Funding Principle in Pensions

The funding principle in pensions refers to the contributions made by the employer and the employees into a single pension fund. The “funding principle” is widely practised across the United Kingdom. Also, the assets acquired from such funds are meant to bring the best long term returns (Emmerson, 2002). The principle is based on the contributions in the active periods resulting in equalled amounts. It is meant to be based on the accumulated funds that yield an interest rate on the capital investments.

Defined Benefit Plans

The Defined Benefit Plans tend to be affected by the labour, fiscal and legal market developments (Kersley et. al, 2006). Such plans include the benefits described in the rules of the employee's existing plan. The valuation of the benefits might suit the person entitled to it, but often holds risks to the employer offering the benefits.

Defined Contribution Plans

Until the 1990s, the defined contribution schemes were only offered to a small minority in the United Kingdom. Now, a vast majority of the population is being offered the defined contribution scheme. In the defined contribution plans, “both the employer and the employees make contributions, but their investments are allocated in their own investment accounts, rather than into a single account (Russel, 1991). Over time, such contributions increase solely based on the performance of their investments. An attractive feature of Defined Contribution (DC) plan is the ability of members to determine their investment strategy.

“Demographic Change and Pension Reforms”

Introduction

Many arguments have been proposed ...