April 08

So, what did everyone think about the exam?

 

Presentation good, letter bad.

I wrote a paragraph about how benefits accrue to age 65, despite the question explicitly saying only consider age 62.

 

I think the paper was a lot fairer than the 2007 papers.

I can imagine that some people sitting the exam, who work in pensions, may have already written a very similar letter in the past.

 

Benny

But if you don't talk about how benefits accrue to age 65, how would you explain the fact that it is reduced if the member retires early?

I thought the examiner meant do not consider what pension they will receive at age 65 (although I did mention that), oh dear...

As for the presentation, I found it tricky in terms of there was nothing technical to explain - it's the project team and they should know what a discount rate and net present value is! If not, well Sep 08 here I come!

 

I am very worried about my assumption that the project team would know terms such as: charges, present value. I thought it wasn't too clear what to include from the information given.

I actually thought the letter was alright. I assumed that the examiner meant we shouldn't consider early retirement at age 63, 64, 58 etc.

I agree that the paper was fairer than 2007, but don't know if this means I'll pass.

 

Liked the letter, did not like the presentation.

 

I think I may be heading for Sept 2008 too - I have thought of a number of possible errors in my judgement!

If we are to draft a letter for the administrator to send to the member, who should it be addressed from? Are we drafting on their behalf or are they sending on ours?

I slipped down the jargon route on the second question too as I assumed that the product development team would know what a surrender is!

 

I liked the letter but not the presentation.

I drafted it as the administrator would be sending the letter ie this is the letter I think you should send to the member with the letter following this. This seems to make sense to me and what I think they wanted by saying "draft a letter for the administrator to send".

Glad to see that some people (Benny) found the presentation better than the letter.

 

I agree with Procrastinator. I made a deliberate decision to use the terms "charges", "discount rate" and "present value" in my answer to question 2.

My reasoning was that this audience should certainly know about these terms. If the team designing an investment product doesn't know what a present value is then I'm not investing in it!

The CA3 set of notes has an example where it asks about the level of knowledge you might expect from different audiences. One example was a "senior actuary". The point is not to avoid jargon completely, but to tailor your communication for your audience.

 

Second question was a bit weird in that I don't think it was a test of being able to simplyfy complex terms in to plain english. I think it was more a test of knowing what was relevant and what wasn’t. For the project team and for the product. It was a medium to long term investment so I only concetrated on the fund values for year 7 and not the earlier years.

Also, I assumed that some jargon terms like ‘present value’ would be OK without explanation. As it was aimed at a project team designing an investment product.

 

Isn't the assumption that the use of jargon is acceptable a pretty big one? Remember that this is the project team who proposed either a 5% initial charge, or four lots of 1.25% - so they clearly have no concept of the time value of money.

As for who the letter should have been written from, I assumed that it should come from the Adviser (as in "You are the Adviser to the scheme..."), so that the Administrator could send it on on your behalf. Otherwise you'd have to pretend to be the Adviser, writing on behalf of the Administrator - a very complicated (an unprecedented in past papers) split-personality arrangement!

 

I appreciate what you are saying and I think (with hindsight) that this is probably correct. However, in practice, actuaries are occasionally asked to put together a member communication that will then be sent out from an administrator or trustee. The question is ambiguous so I hope there is a little leeway in the marking schedule and we don't get completely penalised for addressing the letter from the administrator!!

 

Attachingfish, I don't think the idea of splitting the 5% initial charge into 4 charges of 1.25% is so unreasonable. If jou use the same discount rate as your investment return assumption, they will have the same present value.

If I had to get an equivalent for 5% initial charge, my first guess would be in the region of 1.25% and I do understand the time value of money.

 

I just wrote my letter from the administrator but now I'm having doubts. I'm also hoping there will be some leeway on this.

also ended up doing a plan for my presentation that was way too neat, then a final version with crossing out / smudges etc everywhere... it's all a blur

 

I agree. I concentrated more on the fact that with the 5% upfront you get your expenses recovered immediately but this might prove unpopular. With the charges spread over 4 years and expressed as a % of fund, you are exposed to the fund growth and early surrenders so there is a risk that your expenses never get recovered. Did anyone else approach this from a risk v. competitiveness angle?

 

Hi Vix,

Yes that’s exactly how I went about it - risk vs. competitiveness.

I was also confused about whether to write the letter to the member from myself or to draft a letter for the administrator to send. Had a good few minutes thinking about it in the exam and went for the former approach. Hopefully they wont penalise us for that too much.

 

Yes.

The time value of money was a minor issue - the PV of expenses changed from 500 to 497 in the example which is nothing compared to the effect of 10% p.a. surrendering.

I also commented on the likelihood of renewal in each case.

 

I think that the reason you give the member, from what I have seen of past papers, is that the scheme has set aside funds to meet the cost of a £20,000 pension from age 65. If he retires at 62, he will be getting his pension for an extra 3 years. The amount set aside is not enough for this so it must be reduced.

You had to touch on benefits accrued to date of leaving then revalued to age 65 as the new ERF applied to this figure and the old ERF applied to the pension revalued to 62. However, I didn't give any technical detail, I just confirmed that his pension was expected to be £20,000 at age 65 and the reduced pension he would get at age 62 would be the same under the two ERFs.

Did anyone else mention how ERFs might change between now and his 62nd birthday? This was the bit I found the toughest to simplify.

 

The letter

So we were all puzzled about how to "draft a letter for the administrator to send to the member". I actually had a few words to "spare" and wrote a letter to the administrator (from me, the adviser) and "enclosed" his letter to send to the member. Surely that's not illegal...

 

I think that the short letter to the administrator with the main letter enclosed is a good idea - it's clear and what you would actually do in practice (i think)

However I didnt bother with the time to write a whole new letter.

In my (pensions) work I do draft letter for clients to send out as if they are sending it themselves, though this is typically a mass mailing to everyone, eg about some benefit improvement, and not a individual letter.

There was some question that I practiced (but I can't remember which year)where your manager asked you to draft a memo to a director and I think both structures of sending it yourself to the manager and the manager sending it to the director were acceptable.

I trust that the approach as to who signs the letter shouldn't matter too much, but you never know what examiners would do.

(Do you think the examiners read these forums and take any of the comments into account for setting/marking papers?)