C20 - Sources Of Surplus DONE

Question 1

Define ‘actuarial surplus’ and ‘deficit’

Answer 1

Actuarial Surplus - difference between actuarial value of assets and actuarial liability

Deficit/underfunding - where a scheme has assets less than required by the funding plan for meeting the liabilities

Question 2

Areas where differences typically arise between assumptions and actual experience

Answer 2

• Probability of providing benefit
• Cost of benefit
• Contributions during funding period
• Investment proceeds during funding period

Question 3

Ways a surplus can be reduced or removed

Answer 3

• Transfer all or part of the surplus, either to sponsor or beneficiaries as a one off payment
• Improve member benefits
• Use risks reduction strategies eg more prudent funding basis, de-risk investments
• Reduce future contributions for a period of time so the surplus decreases gradually
• Cushion against future deficits

Question 4

How can legislation impact the use of surplus/deficit in the scheme?

Answer 4

Surplus - used to increase benefits being provided and may indicate which members have priority
- Exclude surplus funds from beneficial tax treatment and may have to pay tax if receiving a return of surplus funds

Deficit - Benefits to be provided even if funds are insufficient ie legally obliged to make good any deficit

Question 5

Why might scheme rules have been set to place restrictions on the use of surplus/deficit?

Answer 5

• Provide reassurance to beneficiaries that benefits will be paid even if the fund suffers from adverse experience
• Attempt to prevent disputes if a deficit or surplus were to arise

Question 6

Reasons it is important to consider the source of a surplus

Answer 6

May indicate:

• How surplus should be used eg who should benefit
• How volatile the surplus is and whether it should be held as a reserve against further volatility

Question 7

Why is it usually the case that deficits are removed quicker than surpluses?

Answer 7

Due to prudence and security of member benefits

Question 8

Key consideration in determining the length of period over which a deficit will be removed

Answer 8

Covenant of sponsor

Question 9

Factors affecting the treatment of surplus/deficit

Answer 9

• legislation
• scheme rules
• discretion of trustees or sponsor
• tax
• source of surplus/deficit
• desired speed of correction and size of surplus
• industrial relations