Pensions Flashcards
3 Types of retirement provision
- Private Individual Arrangements
- Occupational Retirement Funds
- State Provision
3 Important Variables
- Interest / investment return
- Inflation
- Annuity rates (i.e. future interest and mortality rates)
5 Benefit Structures
- Spouses Annuities
- Death Benefits
- Ill-Health Retirement
- Withdrawal Benefits
- Flexible (or living) Annuities
5 Reasons for Employers to sponsor retirement provisions
- Business objectives: attract and retain good staff
- To take advantage of favourable tax treatment
- Paternalistic motive: rewarding loyal or key staff, caring for those in need
- Pooling of expenses and expertise
- The employer may be part of a multi-employer group that provides retirement benefits.
4 Characteristics of defined benefit funds
- Retirement benefit guaranteed according to a formula determined in advance,
- Members are allowed to exchange up to a third of their pensions for a cash sum at retirement
- Commutation factor depends on “value” of pension at retirement
- Increasing mobility of labour complicates matters
Risk distribution in DB vs. DC funds
DB funds: sponsor takes on greater risk, paying higher contributions when investment returns are poor or annuity rates increase
DC funds: member faces greater risk, receiving a lower pension when investment returns are poor or annuity rates increase.
Role of the Actuary in Defined Benefit funds
To determine/approximate the level of contributions required to sponsor guaranteed benefits. This is a very complicated calculation.
- Legislation requires an actuarial valuation of DB funds every 3 years
Role of the actuary in Defined Contribution Funds
To predict benefit to be expected from a given level of contributions. May also give advice on a suitable investment strategy, as well as the matching of assets and liabilities.
Pension
A series of payments which can be valued at retirement using an annuity.
Flexible / living annuity
Annuities that allow members to choose the level of the pension they receive each year.
Defined Contribution Fund
Money Purchase Schemes. Contributions are paid into the fund, normally at a fixed percentage of the members salary. An individual account is held for each member.
The account accumulates with investment returns until the member reaches retirement. The amount in the account will depend on investment returns.
Defined Benefit Fund
Final salary fund.
Benefits that a member receives are based on a formula that is defined in advance.
Most common in SA is a final salary scheme.
Role of actuarial valuation
- Certify that proper records have been kept for valuing liabilities
- Proper provision made for liabilities
- Assets & liabilities have been valued according to legislation, setting out methods and assumptions
- Assets & liabilities have been valued consistently
- The difference in assets and liaibilities have been stated
- Contributions are adequate to meet future commitments
- Professional guidance has been complied with.
Benefits to fund members (tax-wise)
- Deferral of tax
- Tax-exempt part of retirement lump sum
- Lower marginal tax rate on pension
4 Points on the EET system
- Employee contributions are tax exempt
- Investments accumulate tax free
- Benefits are taxed when payed
- Withdrawal benefits are taxed heavily to encourage preservation
