D
dee22
Member
Possibly I'm investing too much time in a decidedly cold topic, but I'm trying to get my head around the seniority purchase for a with profits deferred annuity contract referred to in Chapter 9 (Investment) in Section 3.2 on page 18.
(If nothing else I'm beginning to see why these contracts are no longer popular.)
Can someone let me know where I'm going wrong below, or answer the questions arising?
1. The ActEd text suggests the annuities are only notional, however it would seem to me that contracts need to be allocated to specific members in order to determine the maturity date of the annuity when the returns can be realised without penal surrender rates. I'm also not clear if these contracts are pure endowments (i.e. lost if named member dies) or simply investment policies with a fixed maturity date and penal rates of surrender. Either seems possible, but not sure which is done in practice.
2. Were contributions paid into contracts based on PUL (or some other method which allows for liabilities greater than accrued benefits) this would create a risk of a surplus arising in a particular contract which is then trapped until that contract is surrendered. In effect the assets would be partitioned, so the employer has to pay in more if the "senior contracts" are in deficit, even though surpluses may exist in "junior contracts." This would increase the amount of contributions needed and the surpluses are going to be difficult to recover so it is undesirable.
3. Therefore contributions are allocated based on CUL which avoids surpluses arising (except in the very unusual case of a very dramatic drop in pensionable salary).
4. However, this allocation is independent of the actual funding method used. Were the scheme to use a more secure funding method than CUM such as PUM, how would the assets in excess of the CUL be allocated?
5. In the event of exit of a member, I would imagine the transfer value would ideally be paid out of the scheme's contribution cash flow and the policy retained to avoid paying penal surrender rates.
Is this permissable though, or does the contract have to be surrendered on exit? It occurs to me that this is probably impractical if the contract is a pure endowment forcing the scheme to monitor his alive/dead status after he's left the company. If the contract was not surrendered, is it likely the insurer would permit the scheme to reallocate the funds in the contract to other contracts of later maturity?
6. If not possible and the contract has to be surrendered to pay the transfer value, this would suggest that withdrawals could become a source of deficit for the scheme depending on the balance between value of future salary growth and the penal rates applied on surrender. Is this correct?
(If nothing else I'm beginning to see why these contracts are no longer popular.)
Can someone let me know where I'm going wrong below, or answer the questions arising?
1. The ActEd text suggests the annuities are only notional, however it would seem to me that contracts need to be allocated to specific members in order to determine the maturity date of the annuity when the returns can be realised without penal surrender rates. I'm also not clear if these contracts are pure endowments (i.e. lost if named member dies) or simply investment policies with a fixed maturity date and penal rates of surrender. Either seems possible, but not sure which is done in practice.
2. Were contributions paid into contracts based on PUL (or some other method which allows for liabilities greater than accrued benefits) this would create a risk of a surplus arising in a particular contract which is then trapped until that contract is surrendered. In effect the assets would be partitioned, so the employer has to pay in more if the "senior contracts" are in deficit, even though surpluses may exist in "junior contracts." This would increase the amount of contributions needed and the surpluses are going to be difficult to recover so it is undesirable.
3. Therefore contributions are allocated based on CUL which avoids surpluses arising (except in the very unusual case of a very dramatic drop in pensionable salary).
4. However, this allocation is independent of the actual funding method used. Were the scheme to use a more secure funding method than CUM such as PUM, how would the assets in excess of the CUL be allocated?
5. In the event of exit of a member, I would imagine the transfer value would ideally be paid out of the scheme's contribution cash flow and the policy retained to avoid paying penal surrender rates.
Is this permissable though, or does the contract have to be surrendered on exit? It occurs to me that this is probably impractical if the contract is a pure endowment forcing the scheme to monitor his alive/dead status after he's left the company. If the contract was not surrendered, is it likely the insurer would permit the scheme to reallocate the funds in the contract to other contracts of later maturity?
6. If not possible and the contract has to be surrendered to pay the transfer value, this would suggest that withdrawals could become a source of deficit for the scheme depending on the balance between value of future salary growth and the penal rates applied on surrender. Is this correct?