Contract design for pension schemes

• paternalism
• a desire to attract and retain good quality employees ─ pension income can be thought of as deferred remuneration ─ by linking the benefit provided to the length of service, employees are encouraged to remain with the employer
• pooling pension arrangements for a large number of employees can create economies of scale and lower expenses

One of the key requirements of good design is that they meet the needs of members, in particular with regard to:

• a pension at retirement – how much depends on the extent of State provision
• death-in-service benefits – important for members with young families
• incapacity benefits – most important for onerous occupations
• medical expenses – how important depends on the quality of State provision

However, as well as the cost of the benefits, the employer must also consider the expenses associated with setting up and running a pension scheme.

• legal, actuarial and consultancy services
• investment expenses
• communication to members – members must be provided with full information on joining the scheme and with regular benefit statements thereafter
• compliance – with regard to regular actuarial valuations and accounting requirements

• members get defined benefits, based on formulae set out in the scheme rules
• employer bears risk of adverse experience (particularly with regard to investment and longevity) and, thus, future cost to employer is uncertain
• fixed expenses of running scheme are relatively high (as regular actuarial valuations are required, as well as other specialist expertise – e.g. legal, investment)
• final-salary schemes favour employees with high salary growth who remain in scheme until retirement