Accrual of Pensions

[thegame2002]

Hi

Can anyone help me with this question? In very simple terms in the actuarial context

What is meant by accrual of pension? What happens if there is no future accrual, in the context of pensions?

Thanks

 

[didster]

It's the rate at which you earn pension.

Typical Defined Benefit schemes have a pension formula like
1/60 * service * salary at retirement

So for every year of service you earn, or accrue, an additional pension of 1/60 of your final salary.

(an extra complication is that as you continue to work your salary may go up increasing the "salary at retirement", but this isn't accrual of more pension)

No future accrual is where they stop counting "future" service for pension.

 

[didster]

double post

 

[phantom]

i think "accrual" means the rate at which you become entitled to pensions. e.g. if accrual rate is 1/50 of final salary for each year in service, then serving for one extra year means your accrued pension has increased from being "x/50" to "(x+1)/50" of final salary.

i rather need some clarification for this:
in disclosure requirements it says "the increase in the past service liabilities at the start of the year". how can you measure an increase at a single point in time (i.e. start of the year)? if it means measuring the increase between two year starts then how is it different from "the value of the liabilities accruing over the year"?

 

[phantom]

sorry didster i didnt realise you had already submitted the reply, by the time i submitted. oops.

but what do u think of my question?

 

[didster]

i rather need some clarification for this:
in disclosure requirements it says "the increase in the past service liabilities at the start of the year". how can you measure an increase at a single point in time (i.e. start of the year)? if it means measuring the increase between two year starts then how is it different from "the value of the liabilities accruing over the year"?

All of this is probably way too much for CA1, but here goes.

Not too sure what disclosure requirements you mean. An increase will almost certainly be between 2 points. Usually for accounting, it's the previous year.

"Value of liabilities accruing" can have many meanings.
For one "value" has umpteen ways to look at it, eg ongoing, buyout, Transfer value,.....

Accruing over year depends on what you say accrues over the year.
You can include effect of service only, or include effect of salary increases over the year as well. For other benefits it may get even more complicated, eg how do you split a death lump sum of 2x salary over numerous years of service.

 

[Mark Willder]

I rather need some clarification for this:
in disclosure requirements it says "the increase in the past service liabilities at the start of the year". how can you measure an increase at a single point in time (i.e. start of the year)? if it means measuring the increase between two year starts then how is it different from "the value of the liabilities accruing over the year"?

I think this is a typo in the Core Reading. Chapter 37 page 12 should read:

"the increase in the past service liabilities over the year".

Didster describes a number of differences between "increase in liabilities" and "liabilities accruing" in the response below. In addition, the increase in liabilities will include the change in accrued liabilities from previous years due to changes in the valuation method or assumptions.

Best wishes

Mark

 

[thegame2002]

Please correct me if I am wrong.

So if the pension stops accruing, then the amount in the pension fund is left as it is with no future growth except for investment returns on the current funds??

Thanks

 

[bystander]

Just to add a bit more on no future accrual....

Yes there is no more years adding to the pension, but your salary is still growing with actual experience so its different to becoming a deferred member.

Say the scheme stops allowing future accrual and you have 5 years qualifying service at that time. At that time you earn £10K and the accrual was 60.
Then at the time accrual stops you're pension is 5/60*10K
But if you stay to 60 when you are earning £125K its 5/60 *125K.

If you had left service then the salary linked is broken and you get revaluation at either a known fixed rate, or sometimes some formula dependent on RPI but the earnings inflation link is lost.

Hope this helps illustrate the difference in terms of nature of the liability.