Page 94 - Group Insurance and Retirement Benefit IC 83 E- Book

The most popular type of Life Office scheme is still, after many years, the graded

scheme. This tends to prove inadequate in times of inflation, and for this reason the final
salary scheme is gradually gaining ground; sometimes final salary benefits are

superimposed on a graded scheme for employees within, say, 15 years of normal pension
date. Fixed benefit and money purchase schemes are in the minority: the former suffer

from the disadvantage of not rewarding employees according to salary and service, and
the latter are made inadequate by salary increases at the older ages.

Some schemes provide, in addition to the employee's own pension, a widow's pension for

married men, generally of an amount not exceeding half the employee's pension, and
payable in the event of the employee's death while in service, or after retirement on

pension.

Traditional costing methods—future service There are two traditional methods of costing:

(1) Annual Premium method

When an employee joins the scheme, his pension entitlement is calculated on the
assumption that his salary will remain unchanged in the future. The amount of pension

which will be secured by the employee's own contributions is determined, and the

employer buys the balance by level premiums payable up to normal pension date.
Whenever an increase in pension takes place, a similar calculation is made in respect of

the increase, and the premium is adjusted accordingly. The method can be used for all
types of scheme.

(2) Single Premium method

This method can only be used for graded schemes. The employee's contribution for a

given year is applied as a single premium to buy a pension which may fall short of or

exceed the pension accrual for the year as determined by the employee's grade, depending
on the age of the employee and the relationship between the unit of pension and die unit

of contribution. If the pension bought by the employee's contribution falls short of the
accruing pension, the balance is bought by the employer by payment of a single premium.