Sep 05 1(iii)(b)

[didster]

In allowing for salary increases to the discontinuance valuation, they include 5 years of net salary increases.

Intially I thought to use 10 years, but perhaps it should be less since not all of the members remain in service for the whole 10 years. However, should it be as low as 5?

Am I missing something here?

 

[Elizabeth Horner]

Hi Didster

In this part of the question the Examiners are using a broad brush approximation to adding back on the salary linkage.

They are adding on 5 years' of salary increases as an approximation to the impact of 1 year of increase on the first year's liability, 2 years' of increase on the second.....10 years' increase on the last - ie 5 years' increase on average on the whole liability.

Hope this helps.

Elizabeth

 

[didster]

I thought about that (which may be why I accepted it the first time) but it is a past service adjustment, not so?

The £46m is for service up to 31 March 2005, and in 10 years time it should get a full 10 years of salary increases.

Obviously, this only applies to people still in service after 10 years, but I don't think the withdrawal/retirement effect would be that large.

I also wondered about the future service, but accepted that we start with PU rates including full salary increases, and use the approximate adjustment to make it into a CU rate. I'm have a feeling that the rate for year 10 is probably not right, but I can't think of an alterative possible in the time alloted.

 

[Elizabeth Horner]

Hi Didster

Yes, the adjustment is made in respect of past service so really should get the full increase (on actives who stay in service for the 10 years).

The Examiners's calculation is very broadbrush - you will see they later add on £1m in respect of benefits being payable at a 100% level.

I think it would have been fine to use something more along the lines of 8 years for the salary adjustment and then not separately adjust for the 90/100% issue.

Again, given the approximate nature of the calculations, I think the adjustment to the contribution rates is OK here.

Hope this helps.

Elizabeth

 

[didster]

Elizabeth, thanks for the response.

I'm not sure what the salary increases for actives and 100%/90% adjustment for pension payments have to do with each other.

The former is an adjustment for current active members (who will be active for a while) earning salary increases as time goes by. When you do a discontinuance valuation in the future you have to take account of actual salaries at that point (which should have increased by then).

The latter is an adjustment to reflect that even if you fund for 90% you still have to actually pay 100% of benefits. If I rememer correctly, the current pension payroll was around £1 m, so the 10% "shortfall" over 10 years is around £1m (1*10*10%), ignoring effects of new pensioners, pension increases and discounting.

I'm not too concerned with the actual calculations, since I think have a good feeling of what should happen (in real life we'll do it a little less approximatly with a computer). The problem I face is knowing how to interpret what the examiners want (I would have ignored the absolute value of SCR contributions here and possibility the fact that it's increasing and spent more time on solvency level) and when to use (and what) approximations you can use and when to spell out your assumptions(eg they just said "use 1m say for 100%/90%adjustment" here, all while balancing time.

 

[Elizabeth Horner]

Hi Didster

I was just indicating the overall broadbrush nature of the Examiners' calculations really. There were a number of valid approaches to this question (and it certainly sounds as if yours was a valid approach). So long as you can get your head round what's happening you don't need to produce exactly the same calculations as the Examiners.

Here you would need to spend time on both the current solvency level and future contribution requirements as you have been asked to recommend the contribution rate needed to restore funding over the next ten year period (so you need to consider past deficit and ongoing cost of accrual separately).

If in doubt, the best gauge of how much work/time the Examiners expect is given by the mark allocation.

In general, so long as any assumptions you make are sensible (by which I mean, you'd be happy to apply them at work really) and you note them carfeully then again, you should be fine.

Elizabeth