Ch 12 Pensions And Related Benefits

Question 1

What are the 3 phases of income in one’s life

Answer 1

Pre working age
Working career
Retirement

Question 2

What is the replacement ratio

Answer 2

Income in the year after retirement / Income in the year before retirement

Question 3

How do pension funds differ from insurers

Answer 3

Pension funds are not commercial organisations
Do not sell product or generate profit
They are structured as trusts and operated by trustees who have been tasked to look after the interests of meme eras

Question 4

Explain the organisational structure of a pension fund

Answer 4

If a fund goes bankrupt only the creditors will be affected not the members

Legally a pension fund is governed with trust law meaning trustees make decisions on behalf of members

In SA at least 50% of trustees must be elected by members and no more then 50% by the employer

Question 5

What are the characteristics income in retirement should have

Answer 5

Inexpensive
Predictable
Large
Payable for life
Predictable and stable
Increase in line with inflation

Question 6

What is the formula for pension

Answer 6

Pension = contributions - expenses + investment returns - pre retirement withdrawals / annuity factor

Question 7

How would one maximise the pension

Answer 7

Maximise contributions
Minimise expense
Maximise investment returns
Minimise withdrawals

Question 8

What are defined contribution funds

Answer 8

Operates like a savings account where regular amounts are saved this is done by a percentage of salary being contributed.

Question 9

What criteria does a DC fund meet

Answer 9

Can be used to try maximise final pension
Contributions are predictable

Question 10

What is the downfall of a DC fund

Answer 10

Amount received very uncertain as one cannot predict the return on investment due to the possible high risk investments

Question 11

What are lifestyle / life stage portfolios

Answer 11

Where as the member gets closer to retirement their portfolios will move towards lower risk investments to make amount received more certain

Question 12

What is a defined benefit fund

Answer 12

When the retirement benefit is decided before retirement. Often calculated as a percentage of salary per year of service

A% x salary x years of service

Question 13

What is the accrual rate

Answer 13

Rate at which pension is earned over the service period (typically low)

Question 14

In order for DB fund to work sometimes employers have to make variable contributions and members defined contributions. How does the works?

Answer 14

Employers are able to undertake variable payments

Employers are also larger and therefore they can benefit somewhat from the law of large numbers.

Question 15

Who are the main providers of retirement benefits

Answer 15

State
Employers
Insurers providing retirement annuities

Question 16

What is an occupational fund

Answer 16

When employers provide a vehicle and a contribution towards the employees retirement savings

Question 17

Why is there no need for underwriting on pension products

Answer 17

Very low risk due to it being accumulated savings which would be received regardless of when it is claimed

Question 18

What factors are taken into account inorder to set contribution rates

Answer 18

Amount employers and members are willing to contribute

Expenses of the fund

Costs of benefits offered

Expected investment returns which can be earned by the fund

Question 19

Explain the accrual concept

Answer 19

That members will only qualify for the benefit that accumulates for the time they are part of the fund

Question 20

What type of benefits will be paid before retirement

Answer 20

Death
Ill health
Disability

Question 21

Explain withdrawal benefits

Answer 21

Due to these days employees having multiple employers they might withdraw their accumulated fund and transfer it to the new employees fund

Question 22

What do actuaries monitor in pension funds

Answer 22

Monitoring the fund level

In DB funds they recommend appropriate employer contributions

In DC funds they review allocation of member and employer contribution

Monitor investment performance (check assets vs liabilities)

Monitor the overall experience of the fund