Examining Defined Benefit Schemes Including The Pension Accounting Essay

This essay examines the pension and its chief constituents. Furthermore, it will be examined why public and private sectors are shuting down their defined benefit strategies for new employees. The analysis includes the benefits of defined benefit strategies grounds of employers. And other available pension types for employees will be analysed such as defined part strategy, stakeholder pension strategy and moreover.


Since the beginning of the civilisation, pension is of import for everyone, particularly for older people. Pension provides income for people who can non able to work any more. Pension is of import both for employee and employer. It is obvious why of import for employees who want to vouch their retirement besides of import for employers to happen the extremely qualified, experienced or the best employee. Many people when they choose their work topographic point, they decide harmonizing to pension program. There are many different types of pensions in the UK. Most common three types are ; State Pensions, Occupational Pensions and Personal/Individuals Pensions. Most people have at least one of them, but some people can hold all three.

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State pension has three cardinal elements, which are basic province pension, extra province pension and pension recognition. State pension is a regular wage until the retirement age. When adult female are 60, adult male are 65 they can claim their province pensions.

Occupational pensions are offered by employers. There are 2 chief types of occupational pensions which are defined benefit strategies and defined part strategies.

Personal pensions are for every one under age of 75. Most of the insurance companies, investing houses and Bankss offer personal pension which is besides long term economy.

The Defined Benefit Schemes ‘ shutting down

In recent yearss, many administrations are closed down their pension strategies for new employees. Therefore employers focus on defined part strategies to supply employees retirement incomes. Harmonizing to Greenwood ( 2010, p.70 ) , “ From get downing of 2009, merely 26 % of private sector defined benefit strategies are unfastened for new employees, harmonizing to National Association of Pension Funds study. ”

Defined Benefit Scheme

In Defined benefit strategies, retirement benefits are calculated by hole expression which is related to salary or service. Therefore, employees know how much benefit they will acquire when they retire. The most defined benefit strategies are related to concluding wage which means that employees ‘ retirement benefits depends on their last salary before they retire. The chief advantage of defined benefit strategy is that provides 2/3 of concluding wage. And all hazards are carried by employers. Tax regulations are really rigorous about collectible sums.

One of the most important benefits of this strategy is that having either basic or higher revenue enhancement refunds is controlled by this strategy which means people do non hold to make full in a signifier during the revenue enhancement twelvemonth in order to claim their revenue enhancement refunds whereas it seems an duty for people who saves through either group personal or group stakeholder programs.

However, the people who need hard currency in manus at a certain clip of their life can accept to taking refund from their parts, hence, the employer will no longer add the money in part of employee ‘s strategy which means the employer will non take any hazard after this clip and they do non hold to analyze the employee ‘s future state of affairs in term of fixing pension program. Futhermore, the employees will free their revenue enhancement alleviations and investing growings regard to return they receive. ( Greenwood, 2010 )

Advantages for employees

Advantages for employers

Their retirement incomes can be known in progress.

All affords are provided by employers.

They do non hold any investing hazards related to alter in stock market.

It is calculated by related to their concluding wage ; their earlier wages do non hold any affect at all.

They have option to retire in earlier age.

Death and disablement benefits are covered.

They gain employees trueness.

Valuable workers prefer the company because of pension program.

Additional valuable benefits can be provided.

This pension program can be related to aims of organisation.

Employers can acquire higher investing returns.

Reasons of Decline in Defined Benefit Scheme

There are some grounds why employers are shuting their defined benefit strategies. The chief ground is an effectual interruption down in portion monetary values which were fall down in 2000-2003 and 2008-2009 ( OPA, 2009 ) . Another chief ground which should take into history with this ground is the rise in figure of people who lives longer. In defined benefit strategies, the employer is in charge of transporting most of the investing and other hazards. Defined benefit strategies are acquiring more expensive to fund. There are many grounds which include low involvement rates, increased rewards ( staff costs ) and hapless investing public presentation.

Accounting Standard FRS 17

Fiscal Reporting Standard 17 is designed to put up accounting demands. Companies ‘ pension strategy assets and liabilities must be demonstrated on the balance sheet. All alterations must be reported decently such as growing on their liabilities for pension fund. Harmonizing to OPA ( 2009 ) “ These criterions have been to a great extent criticised because they require companies to utilize price reduction rates based on AA rated bonds which is really deceptive as this understates the liabilities and shortages. ” Besides unwraping a shortage of pension strategy has a immense negative consequence on companies net income. It has particularly consequence the companies defined benefit strategies, but non truly has consequence on defined part strategies. Therefore, employers switch their defined benefit strategies to specify part strategies.

Increased Costss

In our twenty-four hours, people live longer than used to be. The purpose of the strategy is to honor employees sing to their life-time services. However, employers did non anticipate people to go forth this long. Harmonizing to research people leave 5 old ages longer than the clip of defined benefit strategy was introduced. Harmonizing to OPA ( 2009 ) “ An excess five old ages is an excess tierce on the clip the pension was due to be paid. That excess cost of life thirster comes to around 30 % on the liabilities of a typical pension. ” Costs addition because of decreases in values of fund and regulative demand.

The Pension Protection Fund

The Pensions Act of 2004 has been determined to protect members who financess and supply safe retirement, if their companies go into insolvent. This act particularly designed for defined benefit strategy. Sing to Pension Protection Fund ( 2009 ) “ This is funded by levies on the companies runing DB strategies and therefore represents yet another load which has accelerated the closing of these strategies. ”

Other Available Pension Schemes

In these yearss, many employers favour of supplying a defined part strategy. Because defined benefit strategy is more dearly-won and hazardous for employers than defined part strategy which still provide benefit but it depends on parts made. There are some other alternate fiscal agreements for retirement every bit good as defined part strategy, such as single pensions.

Defined Contribution Scheme

Employers replacing defined benefit strategies to specify part strategies, because they can set a lower part. With a portion of this strategy, your pension will be depends on how much you and your employer wage into a fund and besides depends on your investing public presentation. This type of pension strategy provides more advantages than single pensions. In Defined Contribution Scheme, money is turning rapidly because both employees and employers put money together ; in general employers ‘ part is between 5 % and 10 % of pay. The rente rate and value of the fund in the clip of the retirement are of import because these have an impact on pension in this strategy. In contrast to defined benefit strategy, most of the hazards are in employees shoulder. If they fail to pay fix degree of part, their benefits will be lower in retirement.

Stakeholder Pension Scheme

Stakeholder pension strategy, stakeholder pension is a portion of personal pension and add-on to basic province pension. Every employer which has more than 5 staff have to offer this pension strategy, unless provides a better option. It is easy to be member of this strategy which is flexible to get down or call off a strategy any clip. Stakeholder scheme provides many advantages such as low minimal demand ( ?20 a month ) .

Group Personal Pension Scheme

Another type of pension which is acquiring more popular since diminution on supplying defined benefit strategy is group personal pension strategy. This strategy is a package of personal pension strategy. Contribution can be made by both employees and employers but part is non mandatory for employers. It provides chance to take a tax-exempt ball amount at retirement.

Shared Risk Scheme

Harmonizing to ACA ( 2007 ) Pension tendencies study study shows that “ defined part strategies excessively volatile in footings of what they may present, the instance for offering a ‘third manner ‘ whereby both employers and employees can take advantage of the chances to supply cost-efficient and more certain pensions through new hazard sharing agreements ” . Shared hazard strategies will supply advantage for both employees and employers. It aims to portion hazards instead than go forthing the hazards wholly to employees and employers shoulders.


To sum up, employers have right to shut down defined benefit strategy to new members. As we mentioned above, they have many grounds because of hazards. Closing down defined benefit strategy reduces employers ‘ hazards and employees ‘ advantage. However, they both still get benefit from other pension strategies. To give an illustration, Defined part strategy is more flexible than defined benefit strategy. Besides there is low hazard for employers. It is quiet hard to compare these strategies because these all have different advantages and disadvantages.


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