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Pension scheme - Essay Example

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Pension scheme

212). There are several factors that determine the amount of money that each retiree receives. This means that the fact that the defined benefit pension scheme promotes the payment of fixed amount of money every month does not mean that all organizations agree to pay a fixed amount of money to all their employees. Even within the same organization, not all employees receive the same amount of money. The actual contract of fixed amount payment is therefore between the employer and each employee; rather than between the employer and all members on the staff. To create a difference between how much each employee would take upon retirement, there are a number of mechanisms used to calculate the monthly. The commonly procedure is for employers to multiply the number of years each employee worked by a constant pound value (Diamond and James, 1985, p.12). For example an employee may choose to multiple the number of years by ?120. In this case, an employee who worked for 20 years will receive 20 x 120 which is equal to 2400 every month. Defined Contribution Pension Scheme Unlike the defined benefit pension, the defined contribution pension scheme does not guarantee a fixed monthly amount of money. Somehow, the name of this scheme, which is defined contribution, explains the technique behind this scheme and that is, an employee would receive a certain amount of money based on certain contribution made. This calls for the setting up of a fund, such as a pension fund. The employer agrees to pay a certain amount of money into the fund each year. In some jurisdictions, the employee is also free make similar contributions into the fund. The amount of money that the employee would receive each month upon retiring therefore depends on the amount of income that the accumulated money in the fund can generate. A very special feature that defined contribution pension plan possesses is that the recipient of the benefit is also entitled to any investments that the fund that was set can generate. For instance if the fund was invested into a mortgage, the amount of interest that the mortgage investment generates also becomes part of the calculation when determining how much the retiree will receive at the end of each month after retiring. This therefore leaves employers who want to use this pension scheme as a source of motivation for their employees to look for highly beneficial investment funds that can guarantee their employers much revenue for selection. In the absence of such an investment fund, the only amount that the employee can be assured of would be the accumulated contribution made by the employer or by both the employer and the employee (Amoroso, 2003). Comparison between two types from perspective of members of the pension scheme Primarily, members of the pension scheme are made up of employers and employees. In the sight of each of these people, are there a number of factors that they would consider in either agreeing to go for defined benefit pension plan or defined contribution pension plan. Most commonly, the outstanding feature that these two people look at is what is referred to as market risk. Chuck (2012) notes that “market risk is the risk associated with changes in the value of the investments in the plan.” Technically, both types of pension plans are special forms of investments where by in the defined benefit p ...Show more
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Finance and Accounting 1.What are defined benefit and defined contribution pension schemes? Compare them from the perspective of a member of a pension scheme. Defined Benefit Pension Scheme The distinction feature of defined benefit pension scheme is in the procedure of payment and the inputs of factors that determines the amount of money that a pensioner will receive…
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