Additional Mock Exam 3 Q2iii vs Sept21 Q2iv

[Miraj]

Please could someone explain why in SA4 Additional Mock Exam 3, Q2 (iii), when calculating pension cost, the solutions split the pension cost into calculating over a 9 month period, then over a 3 month period - specifically the calculation of interest cost includes calculating net liability and net asset at 1 Oct then at 31 Dec, but in September 2021 Q2 (iv), when calculating pension cost, we can make an assumption of "ignoring cashflows and buyout" and simply calculate over the whole year, e.g. the net interest calculated as surplus at start date x discount rate.

Just want to understand what caused the difference in approach!

 

[Gresham Arnold]

Hi

At the time of the Sept 2021 exam, the Core Reading didn't specify how plan events should be treated for accounting purposes. Therefore, we believe the examiners would have accepted any reasonable approach and, as you say, the Examiners' Report doesn't split the calculations up into two periods.

Since then, some Core Reading has been added to Subject SA4 to cover accounting for plan events under IAS 19 and the solution to ActEd Mock Exam 3 reflects the approach now outlined in the Core Reading.

Best wishes
Gresham

 

[Miraj]

Thanks Gresham, that makes sense!

Please could you also explain in AMP 3 Q2 (ii), when calculating the liability in respect of those who took enhanced transfer values, why does the solution include a change of basis item of (1.015/1.026)^15? I'm not sure what this is calculating or its purpose as the starting liability of 80.5m is already based on a DR of 2.6% pa and revaluation / pension increases of 1.5% pa?

 

[Gresham Arnold]

Hi

That (1.015/1.026)^15 is not a basis change, it is to allow for the fact that, in the question, we are told those who accept the TV offer are, on average, 15 years younger than the average age of all DPs (30 vs 45).

So the line of calculation you are referring to (which is estimating the liability of those who take an ETV) essentially says:

Total DP liability is 80.5m ...

... 30% of DPs take up the offer, so multiply by 0.3 ...

... but those who take up the offer have lower deferred pensions than the average, so multiply by 30,000/50,0000 ...

... and those who take up the offer are 15 years younger than the average, so the liability in respect of these members is going to have 15 years more discounting at the net rate (1+r)/(1+i), so multiply by (1.015/1.026)^15

Hope that helps!