Types of Schemes

Types of Schemes

Retirement Benefit Scheme can be classified in various forms as presented below:

Defined Contribution and Defined Benefit

A defined contribution (DC) scheme is a scheme in which member’ and employer’ contributions are fixed either as a percentage of pensionable earnings or as a shilling amount, and a member’s retirement benefits has a value equal to those contributions, net of expenses including premiums paid for insurance of death or disability risks, accumulated in an individual account with investment return and any surpluses or deficits as determined by the trustees of the scheme.

DC Schemes are arrangements where the retirement benefit is not known or defined in advance. Rather the level of retirement income receivable on pay-out date is related to the:

  • level of contributions made over the accumulation period;
  • the charges deducted by the product provider;
  • the investment returns of the fund during the accumulation phase;
  • the annuity rates at retirement.

A defined benefit (DB) Scheme is an arrangement where the benefits, which is ordinarily determined by the scheme rules, are defined in advance. Benefits are often related to the final salary and/or years of service of the employee. The main risk for beneficiaries is the solvency of the employer so as to be in a position to meet the promised benefits.

Employer Employee Employer Employee
Risk of investment performance Certaiint of benefits (easy tomeasure benefits in terms of adequacy and better for retirement planning) Fixed costs Fixed costs
Potential increase in cost (issue os sustainability) Solvency of employer No risk of investment performance Risk of investment performance
Not very portable (hinders portability) Uncertainity of retirement benefits Portable and transparent

Hybrid Schemes seek to combine features of DB and DC schemes in some way and can take a variety of forms. For purposes of categorization, hybrid schemes are DB schemes because of the promises they make to members.

Provident Fund and Pension Fund

Provident fund means a scheme for the payment of lump sums and other similar benefits to employees when they leave employment or to the dependants of employees on the death of those employees.

In the case of a pension fund at the point of retiring a proportion of the retirement fund is commuted as lump sum with the remainder paid out as periodical payments.  The commuted amount will be equal to no more than one quarter of the retirement benefits in a scheme where members do not make any contributions and not more than one third of the retirement benefits in a scheme where members make contributions.

There are other classifications based on a number of factors such as the manner of investment and whether established by employers or by independent bodies for individual savers. Such schemes are:

  • Segregated Fund and Guaranteed Fund
  • Occupational Scheme and Individual Scheme