April 2014 Q1iv)

[Frances]

Hi,

I have just attempted this question and actually I had a few different answers compared to the answers.

My argument was that more smoothing could have been applied, which would have the effect of increasing smoothed asset share (possibly beyond the guaranteed benefits amount), and therefore making the cost of smoothing positive (as, after all, the cost of smoothing has increased when the company introduced the management actions).

Similarly, I went the other way on surrenders as well and said that increased withdrawals would reduce the cost of guarantees and either not impact the cost of smoothing (or reduce the cost of smoothing if other management actions had made this positive).

I get the logic behind the answers (which have these going the other way), but I wouldn't have thought to start from that given that the impacts aren't going in the direction of the change in CoG and CoS. Would I still have got some credit for the above, or was this not what the examiners were looking for? Please could you explain what the logic is for starting from reduction in smoothing and reduction in surrenders?

Thanks,
Fran

 

[Franners81]

I think the solution takes this approach as the smoothing algorithm has been defined in the question so the only management action would be to apply it or not to apply it.

 

[marilize]

Hi there

In the memo to Question 1(iv) discussing EBR, it is stated that the asset share would increase by more than the smoothed asset share due to three year averaging. I don't understand why this is the case? Return in years 2015 and 2016 were 1% p.a.
It is then stated in iii) that return for equities is assumed to be -50% p.a. and for fixed-interest 0% p.a.
In this scenario the three year averaging would actually lead to return on smoothed asset share being higher than just 0% that would apply to asset share (when reducing EBR to 0%)?

 

[Em Francis]

Hi there

In the memo to Question 1(iv) discussing EBR, it is stated that the asset share would increase by more than the smoothed asset share due to three year averaging. I don't understand why this is the case? Return in years 2015 and 2016 were 1% p.a.
It is then stated in iii) that return for equities is assumed to be -50% p.a. and for fixed-interest 0% p.a.
In this scenario the three year averaging would actually lead to return on smoothed asset share being higher than just 0% that would apply to asset share (when reducing EBR to 0%)?

Hi Marilize
In 2014 and 2015 the assumed investment return on the fund is -25%. If in 2015 it was decided to reduce EBR to 0, then the investment return would reduce to 0% for 2015. However, the smoothed investment return would need to allow for the -25% in 2014, resulting in a lower smoothed investment return and hence a smoothed asset share increasing less than the asset share.
If it was decided not to change the EBR, then the asset share is projected to be lower than the smoothed asset share as the smoothed asset share in 2015 would increase by a geometric average of -25%, -25% and 1%.
Does this make sense?
Thanks
Em

 

[marilize]

Hi Em, that makes sense. I assumed that EBR would be set to 0 in year 2014 already, but I realise now that won’t make sense - the management action would only be taken after the year in which the returns dropped.

 

[RedRose98]

Hi,

I have just attempted this question and actually I had a few different answers compared to the answers.

My argument was that more smoothing could have been applied, which would have the effect of increasing smoothed asset share (possibly beyond the guaranteed benefits amount), and therefore making the cost of smoothing positive (as, after all, the cost of smoothing has increased when the company introduced the management actions).

Similarly, I went the other way on surrenders as well and said that increased withdrawals would reduce the cost of guarantees and either not impact the cost of smoothing (or reduce the cost of smoothing if other management actions had made this positive).

I get the logic behind the answers (which have these going the other way), but I wouldn't have thought to start from that given that the impacts aren't going in the direction of the change in CoG and CoS. Would I still have got some credit for the above, or was this not what the examiners were looking for? Please could you explain what the logic is for starting from reduction in smoothing and reduction in surrenders?

Thanks,
Fran

Hi

I've just looked at this question and I basically have the same questions as Frances - I also suggested more smoothing (I don't see why the smoothing algorithm couldn't be changed) and increased withdrawals. Can anyone advise me if this thinking could be correct? If it's not, could you advise why?

Thanks!

 

[Ashna Satyajit]

Hi

I've just looked at this question and I basically have the same questions as Frances - I also suggested more smoothing (I don't see why the smoothing algorithm couldn't be changed) and increased withdrawals. Can anyone advise me if this thinking could be correct? If it's not, could you advise why?

Thanks!

Hi,

Not sure if this question was ever answered. I have the same question.

 

[Lindsay Smitherman]

The degree of smoothing could be changed - this is covered in the solution to this question. And similarly changes in the levels of withdrawals is also covered in the solution.

Sensible arguments in the opposite directions to those covered in the solutions may well have gained credit as an alternative to the specific examples given there.