Hi For part b)/iii) of Q1, the expense basis for this Group Life is assumed to be pension business, hence its gross. I thought Group Life provides life protection to employees rather than pension? For part ii) of Q2, the answer on page 10 says the more concentrated the company's asset holdings are, the more likely the regulatory peak is to bite. Why? For part iii) of Q2, the answer on page 11 says that "it could be the case that the new realistic peak is lower than, or similar to, the old regulatory peak. Even so...." why could this be the case and what is this paragraph trying to point out? Thank you very much for your help.
I need to check something on this one and will get back to you. The assets that can be included in the peak 1 calculation are subject to the admissibility limits. So, if the assets are concentrated in a handful of counterparties, then some of the assets will be excluded, which produces a lower peak 1 surplus. Peak 2 is not subject to these admissibility limits. So peak 1 is more likely to bite (ie have the lower surplus) if the assets are concentrated. The first three paragraphs need to be taken together. An example may help. When the company was a regulatory basis only firm it may have had a peak 1 surplus of 100. It may have had a RCR of 20 and reserves for future bonuses of 30. When the company becomes a realistic basis firm it no longer needs to hold a RCR or a reserve for future bonuses, so its peak 1 surplus would increase to 150. We are told that the realistic peak is more onerous. So the peak 2 surplus is lower than the peak 1 surplus of 150. However, this does not necessarily mean that becoming a realistic basis firm has made the surplus reduce. For example, if the peak 2 surplus is 130 it is lower than the new peak 1 surplus, but still higher than the old peak 1 surplus. Best wishes Mark
It used to be the case that a small amount of life cover could be purchased alongside an individual pension savings plan so that it counted as pensions business and received gross roll up on the assets. However, this is no longer the case for individual business. However, some group pensions business still retains the right to offer some life cover and receive gross roll up on the assets. Hence the reason to include the group life cover in this question as GRB and use a gross investment return assumption. I was hoping to give a definitive quote on this, but I'm finding the HMRC website particularly unhelpful on this point. If anyone has a good reference for the taxation of group life policies then I'd be interested to hear about it. Best wishes Mark
For (b) (iii) why is the mortality basis just 90% of AM00/AF00? I would have thought it more prudent to assume heavier mortality.
Yes, it would be more prudent to assume heavier mortality, say 110%. However we may think that the best estimate is 85%, so 90% is still prudent. Group mortality depends on the occupation (so we might be assuming that the group covers office workers with low mortality). Also we'd expect a group to show good experience as all the members are fit enough to be actively at work and there is little opportunity for anti-selection (if membership of the scheme is compulsory). The important thing is to show the examiners that you would adjust the table (rather than using 100% in all cases). The actual percentage you quote doesn't matter too much (although it would be good to add more justification than in our solution). Best wishes Mark
Thanks Mark. Like you said, group life is mainly individual pension saving plan, then longevity should be the main risk, isn't it? If so, I think 90% of the AM00/AF00 Ult is more prudent than 110% as you mentioned below? Thanks.
Yes, group life is often attached to defined contribution pension plans. But longevity risk is not the issue here. DC pensions fund for cash at the retirement date. The proceeds are then used to buy an annuity. The annuity product carries longevity risk, but the pension plan does not (unless the plan offers a guaranteed annuity rate). The group life plan (and to a lesser extent, the DC pension plan) are both exposed to mortality risk. So to be prudent we should use a higher mortality rate. Best wishes Mark
