C23 - Discontinuance DONE Flashcards
Factors that will affect the benefits that will be paid to members of a discontinued schemes
- Rights of members
- Expectations of members
- Method of provision of future benefit payments
- Level of assets
Members may feel they should receive the following as a right, on discontinuance:
Benefits they would have received if they had:
- left scheme on discontinuance
- stayed in the scheme with no future accrual
- stayed in the scheme and accrued benefits until retirement
Rights may be viewed as only the:
- continuation of benefits already started
- payments of benefits that have or should have been received
Further areas members may have expectations include:
- Inflation protection
- Further accrual of Benefits
- Payment of discretionary benefits
- Equivalent value to contributions paid
- Minimum funding target benefits
What options for provision of benefits exist on discontinuance?
- Continue as a closed scheme, and gradually remove liabilities
- Transfer to another scheme with the same sponsor
- Transfer to member
- Transfer to an insurer/new employers scheme to invest and provide benefits
- Transfer to an insurer to guarantee benefits
- Transfer to a central discontinuance fund
Describe self sufficiency
- Scheme has a good chance of meeting liabilities without further help from the employer
- Prudent Assumptions are used, may be similar to those used for buyout but without the profit margins
- cautious investment strategy is followed eg government/corporate bonds, longevity swaps/bonds and annuities
Advantages and disadvantages of continuing as a closed scheme
+ Avoids/reduces cost of disinvestment and transfer of assets
+ Surplus arising can be used for discretionary increases or refunded
- No guarantee benefits will be met
- Sponsor still bears risks
- Surplus arising not distributed equally ie only those alive
- Risks and practical problems increase as membership reduces
Advantages and disadvantages of transferring to another scheme with the same sponsor
+ Surpluses and deficits arising will apply to a larger group, reducing volatility
+ Possible economies of scale
- Only possible if Scheme exists
- Surpluses arising in respect of transfers may be used to benefit existing members
- Deficits arising in respect of transfers may need to be supported by existing members
Describe the features when a scheme transfers funds to an insurer to invest and provide a benefit for members
- Capital value of benefit is transferred to appropriate insurance company and invested
- Ultimate benefit will depend on assumptions used to calculate value transferred and any future experience
- Benefits received may be greater or smaller than original benefits
- Individual bears investment, inflation and longevity risk
Advantages and disadvantages of transferring liabilities to an insurer to guaranteed the benefit
+ Provides guarantees benefits
+ Insurer should be financially strong (and there may be a compensation scheme if not)
+ Insurer takes risks
- Insurers charge a premium for risks, profits and reserves needed
- Deferred annuities often more expensive due to lack of competition and risk
- Additional costs may mean that benefits are lower than original
- Risk of insurer failing
How a central discontinuance fund can be financed
By levies placed on all schemes
These could be based on size of scheme, degree of perceived risk, funding level or investment strategy
Central fund will usually take on all the assets to part fund benefits it needs to provide. May also require further funds if they are available from the sponsoring employer or might take a stake in the sponsoring employers business
Benefits from a central discontinuance fund
May provide full benefit originally expected or some other form of benefit such as a percentage of that originally expected subject to certain limits
May be able to guarantee benefits that would be expected to arise from available funds
Factors that may influence which benefits are affected if benefits have to be reduced
Legislation or scheme rules may say which types of benefits or beneficiaries are affected
Often priority is given to those receiving benefits, as others have time to make provisions before retirement
How might surplus assets be used on discontinuance?
- Passed back to the sponsor
- Benefits increased:
- equally across all members
- based on expectations of beneficiaries
- based on the extent to which individuals have contributed to the surplus
Main sources of fund for a discontinued scheme
- Assets that have been funded for prior to discontinuance
- Extra funds given by non-insolvent sponsors (required by legislation or ethics)
- Debt placed on insolvent sponsor
