C16 - Funding method DONE Flashcards
Define modified contribution rate (MCR)
MCR = SCR + spreading of any deficit/surplus
May be case, especially for closed schemes in deficit that the correction is made by fixed amounts rather than as an additional percentage of pay
(Spreading of surplus is the variation from the fund not being equal to the actuarial liability)
4 main funding methods
- Attained age method
- Entry age method
- Projected unit method
- Current unit method
SCR and AL for the attained age method
AASCR = (PV of future bens from cal date to exit based on projected salary) / (PV of future salary from cal date to exit)
AAAL = PV total bens - AASCR% x PV future salary
= PV of accrued bens based on projected future salary
= PUAL
Note total benefits are based on projected final earnings
SCR and AL for the entry age method
EASCR = (PV of future bens for a typical member joining at assumed entry age based on projected salary) / (PV of all future salary for the typical member)
EAAL = PV total bens - EASCR% x PV of future salary
NB EAAL is based on actual members, not typical
How may the entry age assumption be set?
- Chosen as one of the assumptions
- Derived from inspection of actual entry ages of the members
SCR and AL under projected unit method
PUSCR = (PV all Benefits accruing in year following val date based on projected salary) / (PV of salary in the year)
PUAL = PV of accrued benefits based on projected future salary
SCR and AL for the current unit method
CUSCR = (PV of bens that will accrue in year following val date based on projected salary + PV of all bens accrued at val date multiples by a year of projected salary growth) / (PV of salary in the next year)
CUAL = PV accrued Benefits based on current salary
Common adjustment made to accrued benefit funding methods
- Allowance for leaving service revaluation under the CUM
- Control periods applied to the PUM or CUM which lengthen the period over which the SCR is calculated
Give the general conditions for a stable SCR
- Assumptions and funding method remain unchanged
- Benefit structure remains unchanged
Conditions for a stable SCR under each funding method
EAM - Entry assumptions and assumptions about the typical member remain unchanged
PUM and AAM - stable age, sex and salary profile
CUM - stable age, sex, salary and past service profile
Describe what happened to the PUMSCR when:
- the scheme is closed
- proportion of females increases
- member expected to receive below average salary increases leaves the scheme
- SCR will increase as membership ages
- SCR expected to increase if females are expect to live longer than males
- SCR increases
What happened under AAM if the scheme is (assuming assumptions borne out):
- stable, ongoing, mature with 100% funding level
- closed
Open
- AASCR > PUSCR
- so paying AASCR will result in funds in excess of ongoing cost of benefits being built up
- If the surplus is spread consistently the MCR reduces until it stabilises at a point below the SCR
Closed
- Get a stable SCR and MCR if the calculation is performed once at the date of calculation
Give the high low rule and the situation where it cannot be used
For a mature scheme, if a method has a higher AL than another, then it will have a lower SCR
To apply the high/low rule, for an open scheme, it must be stable
This cannot be used for AAM (as payments of SCR generate a surplus)
For a mature, stable scheme rank:
- ALs
- SCRs
EEAL > AAAL = PUAL > CUAL
(Assuming the entry age assumption is lower than weighted average age)
CUSCR > PUSCR > EASCR
(The high/low rule cannot be applied to the AASCR, but it would be expected that the AASCR > PUSCR)
Give the general conditions for a stable MCR
- Conditions for a stable SCR hold
- No initial surplus or deficit so that initially MCR=SCR
- Assumptions are borne out in practice so that there is still no surplus or deficit
- SCR is actually paid
Give the conditions for a stable MCR for each funding method
EAM - Assumptions for entry age and typical member are borne out. New members join at the assumed entry age and in the assumed male/female ratio
PUM/CUM - no additional requirements
AAM - SCR is calculated once at closure
- for an ongoing scheme, the surplus is spread consistently between recalculations
Why are the CUM and EAM unlikely to achieve flexibility in financing arrangements for the employer?
CUM - target reserve is low which mean there is little security offered, therefore there is a high contribution requirement, particularly in later years
EAM - target reserve is high which means there is a risk of surplus funds being held and may be legislation against that
Describe how the following factors impact the SCR:
- Age
- Future service
- Future revaluation
- Past service
Age - if weighed average EA > assumes then SCR increases (if i>e)
Future service - SCR increases if consider more future service (if i>e)
Revaluation- projecting salaries to NRA instead of applying leaving service revaluation leads to a higher SCR (if e>r)
Past service - the CUSCR includes an amount to allow for the increase in AL due to the following years salary increase
Which two types of schemes is the attained method of teen considered suitable, and why might these not be true?
Small scheme, but if average age is due to drop sharply (eg a significant scheme member is due to retire) then the SCR will decrease and a deficit built up
Closed scheme, however not likely that the scheme will remain in this form for long (eg could be wound up) so may result in over funding
Describe the aggregate method of funding
Very closely linked to the AAM
There is no split between past and future service elements and no SCR is defined
MCR is the total value of benefits less actuarial value of assets divided by the future salary of the membership
Prospective benefits funding methods
- Attained age method
- Entry age method
Additionally the aggregate method
Actuarial liability for prospective funding methods
The difference between the PV of the total expected benefits for the members and the PV of the future expected contributions
Accrued benefit methods and their aims
- Projected unit method
- Current unit method
Target a standard level of funding with the SCR set to maintain this target from year to year with adjustments being made when experience does not meet expectations
Difference between protected unit and current unit funding methods
Under CUM the target level of funding is determined in a similar manner to the PUM except no allowance is made for inflationary growth applying to benefits between the date of calculation and the date when the payment of benefits start
