Is There A Future For Occupational Pensions, And How May They Change - Essay Example

?Running head: HRM Insert         Insert Grade Insert 8 March Outline Introduction Different forms of occupational pensions Merits of occupational pensions Demerits of occupational pensions The current and state of occupational pensions. The future state of occupational pensions and the likely change conclusion Is There A Future For Occupational Pensions, And How May They Change? Occupational pensions Occupational pensions and retirement are in tandem; an employer and his employees contribute to funds, which are in form of savings and are paid to the employee upon retirement. Therefore, it is wise to plan for one’s retirement and old age; here, pension benefits individuals once they have ceased receiving regular income. Pension plans are implemented by an employer, the government, insurance companies, or trade unions; however, the coverage of occupational pensions varies in different countries. Occupational pensions are compulsory in countries like Iceland, Norway, Finland, and Switzerland, and they cover approximately 80% of the working population; however, Iceland is rated the top with 82% coverage (OECD, 2011, p.172). In Britain, some employers may exclude some employees from occupational pensions, such as casuals or part-time employees (Griffith and Roberts, 1995, p.16). Needless to say, occupational pensions are viewed as compensation for the employees; however, “the eligibility for an occupational pension can affect entitlement to the state benefits” (Griffith and Roberts, 1995, p.15). This essay will discuss whether occupational pensions have a future, and how they will change. In addition, different forms of occupational pensions will be discussed as well as the merits and demerits of occupational pensions. The essay will sum up by discussing the current and future state of occupational pensions. Different forms of occupational pensions Different countries have different types of occupational pensions; these are determined by the laws governing pensions in these countries. The main type of occupational pensions include contributory pensions, which involves an employee having to part with some of his earnings for instance 5%-10% of the gross salary plus his employer’s contributions (Organization for Economic Co-operation and Development & Private Pensions and Insurance Unit, 2001, p.208). According to Combat Poverty Agency (N.d, p.ii), contributory pension scheme is accompanied by high benefits and tax relief. Non–contributory occupational pension schemes involve the employer’s contributions alone (Organization for Economic Co-operation and Development & Private Pensions and Insurance Unit, 2001, p.208). Open stakeholder scheme is the third category of occupational pension, whereby, the employer does not contribute towards this pension; however, the law requires that this plan be established in a firm that has more than five employees (pension sorter, 2012). Moreover, the United Kingdom law on pensions does not require employers to contribute towards the Open stakeholder pension scheme (pension sorter, 2012). Merits of occupational pensions Occupational pensions are established by the employer with an aim of benefiting the employee, and therefore, they offer tax relief for both the employer and the employee’s contributions. Needless to say, employees benefit from the opportunity to plan for their old age and retirement. In addition, in case a member of the pension scheme passes on, his beneficiaries will benefit from the occupational pension benefits. Nevertheless, an occupational pension scheme can act as a motivating tool for employees; this is because they are aware that their future is secured by their employer, especially in a non- contributory pension. Organization for Economic Co-operation and Development (2003, p.64) argues that, an organization can use occupational pensions to amicably lay off old-aged employees. Such employees are entitled to pensions, which replace salaries. In addition, paying of pensions has proved to be less expensive compared to paying of salaries. Vestad (2011, p.3) adds that, occupational pensions can be used by an organization to reduce labor costs, hence increasing productivity. In the absence of permanent contracts, the employer can use occupational pensions to avoid turnover in the organization. Demerits of occupational pensions Despite the numerous benefits of occupational pensions, they also have some flaws; for instance, when an employee switches employers, contributing to this pension scheme may be challenging. According to Swiss laws, the occupational pensions are fully taxed by the government, and in case of inflation, they are not protected (UBS, 2011, p.2). In addition, in case of death of a member of the pension scheme, the spouse or beneficiary is only entitled to only 60% of the original pension (UBS, 2011, p.2). The Current state of occupational pensions Occupational pensions are present in all stable countries, and are governed by specific rules and regulations of these countries. For instance, in Korea, population is aging fast, and as a result, there is increase in costs of supporting the old. However, its pension schemes are not effective, mainly because it favors early contributors, which results to higher benefits despite their low contribution. Therefore, an imbalance exists between low contributions and higher benefits, which results to a vulnerable financial system (Moon, N.d, p.1). Needless to say, low-income earners are subjected to low pension benefits or no benefits at all due to their minimum contributions. Currently, the occupational pensions are faced with numerous challenges; the decrease in rates of birth for instance in Korea, as well as the increase in aging population contributes to high dependency ratio. As a result, the demand for retirement benefits dramatically increases than the available sources for these benefits. Organization for Economic Co-operation and Development (2003, p.63) adds that, there is an existing gap in the pension benefits between those individuals who have worked continuously before retirement and those whose employment has been short-term. In Sweden, occupational schemes are used for several individual before they reach the required age of 65years. As earlier mentioned, several organizations find it cheaper to pay pensions compared to paying of salaries (Organization for Economic Co-operation and Development, 2003, p.64). However, this can prove to be unfair for those employees who feel that they are not ready for an early retirement, an issue that needs to be addressed. Inflation is another challenge that affects occupational pensions in that, they are not protected from inflation, especially when countries are faced by economic crisis, and as a result, lack of value is evident (UBS, 2011, p.2). Needless to say, the value of an index-linked pension is dependent on the future rates of inflation and future returns (Ellis, 1981, p.1). In the United States, under-funding of pensions is one of the serious problems, which emerged between 2000 and 2002. As a result of a slide in the prices of shares, only 20% of the companies that offer occupational pension schemes were not under-funded. Needless to say, the funded occupational pensions in the United States are as a result of tax free, where enormous amounts of cash is saved; therefore, the compound interest increases the returns. However, not all countries have the capability of funding the occupational pensions (Deutsche bank research, N.d, p.1). Currently, government regulations play a vital role in influencing the employer’s willingness to provide occupational schemes for his employees (Bridgen and Meyer, 2005, p.771). A shift in occupational pension strategies is notable especially in the United Kingdom; the defined contribution, also known as money purchase, involves employers paying for the occupational pensions, however, the employees are kept in dark concerning how much their retirement benefit is worth. In addition, the money purchase schemes result to the ceasing of payments once the employee resigns from his workplace. Broadbent, Palumbo and Woodman (2006, p.5) argue that, traditionally defined benefits are becoming unpopular in most countries, and as a result, defined contribution is preferred today by occupational pensions companies. Defined contribution minimizes the losses associated with defined benefits plans, therefore providing temporary workers with flexible options of saving and managing retirement savings (Broadbent, Palumbo, and Woodman, 2006, p.5). Increase in workforce mobility has contributed to the shift, especially in the United States, which was influenced by under-funding of occupational pensions. This is because employers can contribute minimum amounts to the occupational pensions, compared to the traditional occupational pensions, which involved higher amounts for the employers. However, the current occupation pension schemes require employees to contribute more. Therefore, based on the above research, it is evident that increased savings from employees is necessary before retirement. The future of occupational pensions and the likely change The current challenges and merits of occupational schemes are a strong base to address the future of these pension schemes. It is evident that occupational pensions are associated with high costs, especially in managing them. In most countries, employers are forced to handle the issue of occupational pensions solely. According to Bridgen and Meyer (2005, p.772), government regulations contribute to the willingness of employers to participate in occupational pensions. In addition, employers are also benefiting from the occupational schemes, especially in motivating and retaining employees. The low birth rates and increasing levels of the elderly is a problem likely to progress in the future. As mentioned earlier, increased levels of the elderly results to increased expenses for the employers. According to Organization for Economic Co-operation and Development (1988, p.71), the economic status of the elderly is influenced by the pensions; however, OECD results showed that their vulnerability to poverty had decreased and they were estimated to earn between 75-90% incomes. Moreover, the economic status of the elderly is likely to change in the future, for instance, in countries that have immature pension schemes, the income levels of retirees will change in the processes of attaining pension schemes maturity. As a result, there is a possibility that the elderly will have access to occupational pensions. However, the lower income earners are likely to have limited access to occupational pensions. There is fear of the possibility of millions of the elderly facing poverty in the future. This is as a result of a research showing that in Britain, the number of employees in final salary or defined benefit occupational pension schemes has dropped by 2million in the last 10years (pension 100, 2011). However, there are varieties of reasons why employees are shifting from the famous schemes to money purchase or defined contribution schemes. Traditional schemes are continuously abandoned, which is also a likely trend in the future, however, the commonly adopted money purchase schemes leave employees unaware of the sum of money they will receive in total. The main reason why companies have abandoned the traditional schemes is because they only have to contribute less as employers, while employees contribute more. Therefore, it is possible that in the future, employers will completely abandon their contributions to the occupational pensions, leaving the task to the employees. In addition, the younger working generation will be forced work for many years before retiring in order to save more, in order to survive upon retirement, the low income earners are at a disadvantage because they cannot afford to save a lot of money. Needless to say, the occupational pensions in the future may change the qualified age for retirement benefits; at the moment, the retirement age in most countries is 60-65. Needless to say, technological advances have yielded to better services, especially in medical health. As a result, the life expectation is increasing, and therefore, the possibility of individuals living longer after retirement is high in the future. Ros (2010) argues that, pension ages are likely to change in the future, and by 2020, the pension age may rise to 66 for both genders in the United Kingdom, while in France and Spain, the retirement age is expected to increase to 67 years. As a result, it will be possible to acquire higher levels of benefits with the increase in retirement age. In addition, if the government increases the employment levels, the occupational pension schemes will benefit as a result of high membership numbers. Conclusion Retirement involves ceasing of employment, whereby, an individual is required to relax after continuous years of employment. Therefore, retirement is only beneficial when it is made easier, through retirement benefits are capable of meeting the needs of the retiree until his time of death. Occupational pension benefits play a huge role in an individual’s life after retiring. However, the above research has proved that these pension schemes have benefits and flaws as well. Their main challenge has been the imbalance between high-income earners and low-income earners. In addition, the decline of government and employer full participation is alarming. Needless to say, the future of this pension scheme is arguable; however, the possibility of positive change is evident in the future as a result of implementation of new policies by governments globally. Reference List Broadbent, J., Palumbo, M., & Woodman, E., 2006. The Shift from Defined Benefit to Defined Contribution Pension Plans. Implications for Asset Allocation and Risk Management. Online). Available at: http://www.bis.org/publ/wgpapers/cgfs27broadbent3.pdf (accessed 08 March 2012). Bridgen, P., & Meyer, T., 2005. When Do Benevolent Capitalists Change Their Mind? Explaining the Retrenchment of Defined-benefit Pensions in Britain. Social Policy & Administration journal, Vol 39, No 7. Online). Available at: http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=4&hid=113&sid=2e6d43d9-d3d5-4982-9928-c483eb7426ab%40sessionmgr112 (accessed 08 March 2012). Combat Poverty Agency. N.d. Progressing Pensions Against Poverty: a response to the National Pensions Policy Initiative. 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