Beruflich Dokumente
Kultur Dokumente
EXAMINATIONS
September 2004
Paper One
MARKING SCHEDULE
Faculty of Actuaries
4/3/04 Institute of Actuaries
Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
1 (i) Investment risk passes from the company to the members. [½]
and possibly requiring large lump sum inputs in the short term, [½]
Some DB expenses would not necessarily be incurred under DC, e.g. cost of
actuarial advisers, but such savings might be offset by increased expenses in
other areas. [½]
Eliminates potentially generous and expensive options built into DB rules, e.g.
for early retirements [½]
Easier to tie in with the provision of “cafeteria” (or “cost to company”) style
of benefit provision overall. [½]
[8½ out of 5]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
(ii) Advantages:
Disadvantages:
which often replaced with very inappropriate risk benefit provision. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
Members bear cost (through lower benefits) of use in most cases of insurance
products (expenses, commissions, margins and profit loadings). [½]
Members bear cost in medium and smaller funds of “no credibility” attributed
by insurers to good in service mortality experiences. [½]
Members bear risks of the terms on which the fund account is converted into
pension at retirement, [½]
Members most often bear full investment and administration costs. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
Full control over choice of mix of assets between various sectors. [½]
Costs of managing own pool of assets is cost effective for large schemes. [½]
Costs of managing own pool of assets may not be cost effective for small
schemes. [½]
Investment expenses may be higher than for a segregated fund, especially for a
large fund. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
Over time the unvested component (or the equivalent in a fund with full
guarantees) will in any event increase from zero initially to as much as 30% or
more of total assets, adding to liquidity disadvantage. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
(ii) Investment objectives of Fund and level of risk that is acceptable to trustees.
[½]
Compare discounted value of assets, allowing for expected future returns, with
the surrender value offered. [½]
3 (i) The provisions of the rules in regard to individual transfer values. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
R 000’s
Detail steps being taken to rectify situation e.g. increased contributions. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
And expose the fund to the possibility of shedding its property investments at
prices that might be unattractive, [½]
and any changes in the real rate of return over time. [½]
Hence return does not necessarily match inflation unless held for full term. [½]
And hence may not match the fund’s liabilities related to price inflation. [½]
Especially after taking into account retirement funds tax in regard to liabilities
in respect of any deferred pensioners. [½]
Although it has grown, the market in index-linked bonds is very small, [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
But not liabilities fixed in monetary terms — current level of pensions. [½]
And not best hedge for pension increases related to price inflation. [½]
and risk associated with precious metal prices, oil and commodity prices,
which can be quite volatile. [½]
Currency risk will remain if the Rand does not stabilise in value against
Dollar, [½]
and hence against that element of inflation that is a consequence thereof. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
and helps to ensure that fund meets requirements of Regulation 28, [½]
(ii) The trustees should consider the following asset classes, subject to overall
investment objectives and risks. [1]
SA property: [½]
As diversification. [½]
To match salary related liabilities. [½]
Reasonable range, 0% to 15%, say. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
• He has benefits currently of value R10.8m on a transfer basis; value may even be
higher on the statutory basis for valuing benefits. [½]
− So he is likely to suffer some penal tax unless benefits can be “banked” [½]
− ..or there is a high level of indexation on the R12.0m. [½]
• ..or he can persuade his former scheme to settle the tax (unlikely?) [½]
• So it is likely that he will receive less net income than he might otherwise have
expected [1]
• Pension earned after the introduction of the limit will almost certainly all suffer
the penal tax [½]
• ...but he has an opportunity to try and negotiate a package with his new employer
that will leave him “no worse off” than if the limit didn’t exist [1]
Decisions to be taken
Existing benefits
• Transfer to new employer or leave where they are? (if transfer, more likely that
new employer/scheme might cover the additional tax charge?) [½]
Future Accrual
• Possibility of maximising pension accrual before the date the limit is introduced if
funds over R12.0m can be “banked” [1]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
• Current circumstances
• Future expectations
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
• Any favourable early retirement terms not allowed for in the transfer value (can
increase benefits in value from R10.8m to significantly more than R12.0m) and
might create unexpected penal tax charge?) [1]
Assume that the new employer wants the package to be attractive to the individual
[½]
... but at an acceptable level of costs [½]
• May have very specific objectives about how they want to structure the rewards
for this individual however? [½]
− (one less now, may shift balance, create opportunity for increasing the
performance related element of the package — pensions typically aren’t) [1]
− Stability, durability and realism of costs (in cash and accounting terms) [½]
• Existing practice for members affected by any limit on tax-approved benefits? [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
• Security may be reduced (if alternatives are deferred, unfunded or linked to health
of employer) [½]
...so, should individual seek more than monetary equivalent of value of pension to
compensate (employer may argue that pension wasn’t fully secure either?) [1]
[34 from 24]
While not stated it follows that the directors should be seen to be taking
actuarial advice. [½]
The assumptions are an enterprise’s best estimates of the variables that will
determine the ultimate cost of providing benefits. [½]
Where appropriate only, there should be consistency from year to year. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
Financial
There is a very limited range of bonds that are suitable by term. [½]
For example, only the government bonds R150 & R153, both
relatively short, have a large turnover. [½]
And the R186, while more suitable from point of view of term, has
always been priced at a premium to other bonds, hence lower yield.
[½]
But we can also be guided by yield curve. [½]
Hence there could be some scope for justifying a higher discount rate,
[½]
But any year on year change would have to be properly motivated. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
Possibly some margin in pensioner mortality basis given that prudence would
have required actuary to allow for improvement. [½]
But caution to be exercised in removing such margin. [½]
Might be some scope for “tweaking” other assumptions, [½]
particularly if last funding valuation some years ago and recent experience
indicates a less cautious approach. [½]
[20½ out of 15]
Since no new entrants and no exits from actives (no benefit outgo in
respect of actives and no commutations) then all the gain must be from
salary experience. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
Therefore at 12.0%:
33.6 × (1.10/1.12)14 = 26.109m [½]
Balance sheet:
(iv) Discount rate now 1.5% above yield curve vs. yield curve in prior year. [½]
Not consistent. [½]
Very large jump. [½]
Above likely to give rise to queries, from auditors. [½]
Likely to be at top end of range of corporate bond yields, or even over. [½]
Also matching of fixed component of liabilities difficult, maybe impossible.
[½]
Salary increase has been set (approx.) equal to actual rate in previous year. [½]
But rate should be long term. [½]
It is now very close to inflation, which evidence would suggest is imprudent /
unrealistic over the long term — not enough allowance for merit etc.. [½]
Again no margin at all or scope for reduction in future years. [½]
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Subject 424 (SA Fellowship Pensions) — September 2004, Paper 1 — Marking Schedule
Basis is actuarially unsound as regards both interest and salary increases. [½]
[5½ out of 4]
[37 out of 27]
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