AASCR v PUSCR

[SingingSong]

Hi

Just a quick question on the AASCR vs PUSCR:

The AASCR aims for overfunding, the revision notes Q53 asks to “describe 2 situations where when the AAM may not be an appropriate funding method for a small scheme and suggest a more suitable funding method in each case.” The answer to this is part of the core reading, which talks about the follows:

1. Possibility of winding up in the future: as AAM aims overfunding, so this might not be appropriate; and,

2. Where the average age of the membership is due to change sharply, e.g. a large proportion of the membership is due to retire in the near future.

Point 1 makes perfect sense to me; however the core reading re point 2 seems suggesting AASCR could initially be lower than the PUSCR, I just couldn’t get my head round. As this is a small scheme, we expect low movement/membership turnover and therefore future salary roll is likely to be stable. The core reading gives an example of a large proportion of members due to retire in the near future, I expect a decrease in AASCR immediately after these retirements as the result of decreasing in the average age; but surely PUC method takes this into account as well, which would lead to an even lower SCR; in addition, I (maybe falsely) assume as AAM aims overfunding, therefore it should always give a SCR at least equal to that of PUM. Could someone please explain this?

Many thanks.

 

[SingingSong]

Hello, it has been a week since my original post. I'd appreciate it if someone can kindly help me out here. Many thanks.

 

[didster]

Deleted earlier comment because I misread the question

AA is more long term whereas PU is more current cost. Current cost for people about to retire is ok, as is for people who stay. AA will be a bit distorted. Either way profile and salary is not going to be stable (because a large group are leaving).

I'll have a think about a case where AASCR would be worse than PUSCR.

Some cases where AASCR <PUSCR, eg when there is a cap of service used for benefits but contributions continue (but that is not the example here).

 

[Gresham Arnold]

Hi SingingSong

Self Assessment Question 15.48 in the Course Notes illustrates how the AASCR could be lower than the PUSCR if there is about to be a significant change in membership.

What's going on in this question?

There are two members, let's call them A and B.

A is young, has a low salary and lots of future service. I calculate that the PUSCR for A alone is about 12% and the AASCR for A alone is about 17%

So, the AASCR > PUSCR for A.

B is old, has a high salary and only one year of future service before retirement. I calculate that the PUSCR for B alone is about 25% and the AASCR for B is also 25%. (Recall that, all other things being equal, the AASCR = PUSCR if the individual is control period years from retirement.)

Under the PUM (with a 1 year control period) we are looking a benefits that accrue over the next year. B's high salary (and old age) mean that he/she dominates the calculation of the SCR. And so the PUSCR for the two members taken together is 23.8%, pretty close to that of B alone.

Under the AAM we look at the PV of benefits earned in all future years and divide by the PV of salaries in all future years. A dominates the calculation as he/she has many years to go to retirement, whereas B has only one year. So the AASCR for the two members taken together is 19%, pretty close to that of A alone.

So, in this (admittedly extreme) scenario, the AASCR of the two members (19%) is lower than the PUSCR of the two members (23.8%).

Hope this helps

 

[SingingSong]

Thanks.