C8 - Options DONE Flashcards
Give a risk with options and how this can be guarded against
Risk of anti-selection
Can set terms that favour one option over another and by setting suitable eligibility criteria
Give a common guarantees offered in both a DB and DC scheme
DB - minimum value of benefits for the contributions paid by the members
DC - minimum level of contributions paid by the member
Give seven options that may be granted in relation to retirement benefits
- Transfer to another scheme
- Early retirement
- Late retirement
- Change level or form of pension increases
- Conversion of benefits from pension to cash (commutation)
- Conversion if additional contributions to pension (augmentation)
- Transfer of benefits between beneficiaries eg dependant pension
What are the main factors in determining assumptions used to set option terms
- Relative value of option compared with the expected cost of providing the regular benefit
- Fairness to other beneficiaries
- Provision in the rules
- Regulatory and legal requirements
- Whether to evaluate the option on a market related basis or not
- Investment strategy
- Security of remaining benefits and beneficiaries
What should be allowed for where the option involves a significant difference between the timing of alternative benefits?
Why is this not always the case?
Current conditions
If the difference in costs is not too significant relevant to the benefits as a whole then it may be ignored on grounds of simplicity
How can the risk of anti selection on early retirement be avoided?
What impact does this have on the assumptions?
Making the option only available with consent of the employer or trustees
Restriction may mean less caution can be adopted in the assumptions used to determine the terms or approach used to determine benefits given up
Measure that can be taken to limit the risk of anti-selection when surrendering pension for additional dependants pension
- Limit on the amount of pension that can be surrendered
- Option terms assume members who take the option have high mortality
- Option could be subject to evidence of members good health
- Availability restricted to period just prior to retirement or in certain circumstances after retirement
Parties with an interest in consent for an option
- Members
- Trustees
- Employers
- Regulators and governments
- Actuaries
Trustees role in relation to consent for options
- Protect benefits
- Ensure funds are available for benefits of all beneficiaries
- Ensure fairness across all beneficiaries
Required to give consent where:
- potential for members to receive higher value benefits than their regular benefits
- options require a large cash lump sum in order to manage liquidity
When members may exercise an option
If it offers them greater:
- Flexibility
- Benefit Security
- Value for money
Issues when calculating transfer values
- Allowing for discretionary pension increases
- Security of remaining members benefits
- Ensuring full value of transferred in benefits
- If a market related basis should reflect scheme assets or assets appropriate to the benefits being transferred
- Who should pay expenses
- Legislation
- Variations in the covenants of sponsors
Consent of an actuary before option exercised
Before giving consent actuaries may be require to advise on the terms for options or certify that practice has been reasonable, especially where there is a change in the nature, form, timing or value of benefits
Reason for offering enhanced transfer values
To encourage members to transfer out to reduce the sponsors risk exposure
Advantages and disadvantages of incentive exercises for the employer
+ May reduce investment, inflation or longevity risks
- Members may not be treated fairly or understand the implications of the option
What approaches can be used to calculate early retirement benefits?
With relation to the benefits that would be paid if the individual:
- remained as a member and continued to accrue benefits until NRA
- remained as a member without accrual
- ceased being a member immediately
