My question is regarding the loss on benefits paid due to actual pension increases being higher than expected. 1) The solution calculates the difference in the expected benefits paid under the old pincs (2.5%) vs the expected benefits under the actual pincs (2.5%), but I would have thought the calc should be expected bens under expected pincs minus actual benefits under actual pincs i.e. 20*3*1.05^1.5*1.025*1.5 - 65*(1.025/1.055)^1.5*1.05^1.5. Is this because the difference in expected bens vs actual bens is so small (ie 3*20*1.055^1.5 ~ 65.01745 vs 65) that it doesn't matter which formula we use? Surely even though they're similar, it's best to use actual cashflows in the first instance? 2) In the final surplus reconciliation calc, the contributions line is separate to the salary increases line, but the pensions in payment line includes both pinc differences for benefits paid and for the liability for pensioners yet to be paid - why is this? Is this just an arbitrary choice as to whether to split experience from benefits paid + pincs (i.e. not split in this solution) and conts + salary increases (i.e. split in this solution)?
Hi Lucy There are different ways of doing analysis of surplus calcs, but I don't think you can use the 65m actual benefit outgo to assess the impact of higher than expected pension increases in the way you describe above. This is because the 65m benefit outgo figure will include not just pensions in payment, but also commutation lump sums, CETVs, death in service lump sums etc, so it is not directly comparable to the expected pensions in payment figure. In the reconciliation, I think the pensions in payment line is showing the loss of surplus arising because pension increases have been higher than expected and so (i) pensions paid out over the intervaluation period have been higher than expected and (ii) pensions to be paid in future are now higher then previously expected (reflected in the pensioner liability at the valuation date being higher than expected). In other words, the pensions in payment line is solely about the impact of pension increases - there is no allowance in here for other benefits (CETVs etc) being higher than expected. I hope that helps Gresham
