Pensions

• Defined benefit schemes

  • Normally based on either final salary or average salary of employees during their career.
  • Actuaries - specialists who help with these schemes
• Defined contribution schemes

  • Depends on the contributions paid into the plan by the employee and the employer.
  • Employer pays a % of salary into the scheme - Employee pays a % of salary
• DBS Employer Advantages + More likely to get a higher return + Help attract and retain talent
• DBS Employer Disadvantages - More risk lies with the employer - need to meet liabilities that fall many years ahead.

  - Relies on actuaries estimates being fairly accurate
• DCS Employer Advantages

  + reduced costs as DCS can be significantly cheaper

  + reduces SOFP liability, improves gearing

  + shifts risk to employee
• DCS Employer Disadantages

  • Goes back on promise and possible reputational damage
  • Could impact on recruitment (less attractive to current and future employees)
  • Lose talent from your company
• DCS Employee Advantages

  + portability of pension
• DCS Employee Disadvantages

  • Reduces their pension pot
  • Risk transferred from employer to employee
  • Gives more uncertainty to how much money employees have at retirement
• Contributions - Journal entry DR Pension Asset CR Bank
• Benefits Paid - Journal entry

  DR Pension Liability CR Pension Asset
• Other Journal Entry DR SOCI CR Pension Liability