Cony Flashcards
Accrual rate
Rate at which the pension benefit is built up , often expressed as a fraction of annual salary .
The accrual rate is set to provide a member retiring after a full carer in the fund with target income replacement ratio. Eg. Income replacement ratio is 70% and retiring after 35 years then accrual rate should be 2%
Accrual rate is set considering
Cost control
Recruitment
Retention in mind
Subject to statutory max or min
Db context, total contribution rate depends on
The design of the fund , most imp the benefit
Actuary funcinding method
The assumptions adopted ( salary inflation , post retirement mort, disc rate)
Surplus or deficit arising from due to experience being different than previous assumptions.
Why have dbs reduced as employer based schemes
Labour mobility has increased
Portion of workers who are employers by small or micro enterprise or self employed has increased
Greater awareness of the risks of relying on employer guaranteed retiremne5 arrangements has led to more onerous accounting and funding rules for the employers
Since employer base schemes are concerned with benefit while working, greater statutory protection for those who employement early and who who have retired
Difficulties in justifying tax reliefs for above avg retirement provision
Even the ost financially stable employeers, cannot credibly commit to securing retirement of former employees
Db is more common for state employees or civil service pensions
-State employees are often unionised , making benefits hard to change
-States are monopolies, there is less cost competition
-Civil services are hierarchical, so employers may attach a significant value ensuring that senior employees retire when it is convenient for the employer
-Funding regulation for state employer is more lenient than other funds because of lower credit risk
NDC advantages and disadvantages
Risk shared between generations
A greater degree of risk sharing between different stakeholders
Easier admin
Disadvantages
Credit risk assumed by members
Risks associated with underfunding
Lump sum over annuities for retirement
- The cost of admin annuity benefits is higher than the cost of administrative lump sums due to the retirements to pay regular payments and to verify that peonsilns are still alive
- Members may prefer lump sum to pay mortgage or leave inheritance
- Lump sums are more flexible,e for members that they can be used purchase annuities or other retirement streams
- Since legislation does not allow for transfer of retirement savings into a single fund on retirement, annuity benefits make it difficult for the member to considerate their retirement income into a single stream
- Bears longevity risk and therefore, may be cheaper to provide lump su. And liability ceases
Lump sum more suitable for death ben
- Small ben
- Does not want to establish relationship with beneficiary
- Cost related reasons
Income vs lump sum
- Annuities provide regular inco,e similar to salary
- Life annuities cover mortality and longevity risk
- Many members are unfamiliar with management of large lump sum amounts
- Liquidity rewtjments in a individual kev, are reduced if ben are paid in stallments
- May be cheaper than having to buy retirement annuity
Penalties
1 transfer resources away from short serving to long serving
2. To ensure that workers retire at times that are convenient for employers.
Db funds are still common for national pension systems
- state pensions are difficult to change
- certainty of benefits is important if the primary objective of the system is poverty relief at older ages
- db funds can ensure inter generational risk sharing , which dc funds struggle to do
NDC advantages and disadvantages
Advantages:
- risks shred between generations
Risks shared between diff stakeholders
Easier admin
Disadvantages:
Credit risk on members
Risk of underfunding
Stand alone
- Employers are more involved in managing
Have greater control over : benefits offered, service providers used , potential costs - Require more manage ent time
- Exposes management to fudiciary risk
Umbrella fund
- Large and can be more cost effective due to economies of scale
- Run by individuals independent to the participating employer
- Employer has less control
- Need to take care in allocating liab for funding purposes , particularly in the event of insolvency
Due to their size , can offer more benefits
Increased regulations, professional trusted deal with these issues
Employer has more time to focus on core business
Operational risk may be difficult detect
Conflict of interest if the employer appoint trustees , investment manager or fund administrator
Supply constraints for life annuities
- The large amount of capital insurance companies need to bear the significant agg uncertainty in the future development of long run mortality
- The lack of long run debt instruments that insurance companies can use to back annuity liabilities and hedge out interest rate risk
- The lack of sufficient quality rate on mortality of annuity purchasers
Advantages of income drawdown
- Control over where the fund is invested and how much pension to take each year
- On death, the balance goes to the heirs
Disadvantages of income drawdown
- Managements may be complex - how to take as income , how to invest and what service providers to use
- Pensioners may not have the required skills and experience to manage these products week
- Cognitive ability declines with age - risk of mismanagement
- Pensioners bear investment risk - volatile income in old age
- Longevity risk - no guarantee that capital will last
- Cost of admin, investment charges, advice or commission may increase the risk of pensioner outliving the capital
- The remaining capital may be insufficient to provide adequate benefits for a dependent
Product cycle
Design , pricing, admin , marketing , underwriting,claims management,experience,monitoring and valuation
Underwriting
Process of classifying risks, it is used to decide if the insurer will take on a risk and if so at what terms.
