Surplus in a benefit scheme

[ST6_aspirant]

April 2013 paper 2 question 6

Reasons why surplus in a benefit scheme increased 10 times since last valuation.

One answer is: increase to benefits less than expected - this may be pensions in payment, deferred revaluation or salary increases (if members still working for the company have retained salary linkage)

Have not understood the underlined part of the answer.

 

[Lindsay Smitherman]

Hi

In a defined benefit scheme, the pension is based on a % of salary, where the % depends on how many years of service the individual has completed.

Deferred revaluation: when a member of a pension scheme leaves (e.g. to work for another employer), their accrued benefits may remain within the scheme as deferred benefits. These would be based on the salary at the time of leaving, but possibly also with increases from that date up to the retirement date (e.g. in line with inflation). These increases are the "deferred revaluation".

Retained salary linkage: when the pension scheme described in the question closed to future accrual, the benefits for members still working for the company may have been fixed at an amount based on the salary at the time at which the pension scheme closed. Alternatively, the benefit may continue to be based on the salary at the time of retirement: so the % is fixed but the salary amount to which it is applied will not be known until the member retires. The latter is the retained salary linkage, i.e. the benefit continues to be linked to salary.

Hope that makes sense.

 

[Frances]

Could you explain why this would not mean increase to benefits more than expected? i.e. if retained salary linkage, then wouldn't benefits cost more?

Thanks,

Fran

 

[Lindsay Smitherman]

Could you explain why this would not mean increase to benefits more than expected? i.e. if retained salary linkage, then wouldn't benefits cost more?

Thanks,

Fran

Hi Frances

If salary linkage is retained, then this means that when the liabilities of the scheme are being determined there needs to be an estimate made of how salaries will increase between the valuation date and the date at which benefits will be paid out. If actual salary increases have been lower than expected over the period since the last valuation, or if the expected level of future salary increases up to retirement has reduced from what was previously assumed, then the expected benefits payable will be lower than the level that was expected at the previous valuation. So this could be a reason for the increased surplus.

Hope that makes more sense?