Hi,
I have a few questions regarding the paragraphs below:
Appreciate any help on this. Thanks!
I have a few questions regarding the paragraphs below:
- For example, the purchase of annuities by a pension scheme may in itself create a liquidity risk for the pension scheme. - does it refer to pension scheme paying a lump sum to buy the annuity, or the fact that they would need to pay the regular income to their members upon retirement (which I would see the risk similar to longevity risk)?
- The purchase of cover for death-in-service lump sums will, however, remove a potentially significant liquidity risk. - how so? I can understand that the pension scheme paying out annuity involves longevity risk, which could be offset by offering an insurance on death as it involves mortality risk. This is what I would imagine happens if people are paying a premium for the annuity and the insurance to the pension scheme, but I don't think that the case explained by the statement here?
- This may be particularly important for a pension scheme that is immature or small, as the investment income may be low relative to the death benefits. - Is it correct to say that members (and their dependents) under the pension scheme would be entitled for the regular income after retirement or death benefit before retirement? Hence, if the pension scheme only bought an annuity, they would only have the investment income coming from the annuity, which if bought when the member joined the scheme, wouldn't be enough to cover the death benefits. Therefore, that's why the scheme buying an insurance would be able to cover for the mortality risk.
Appreciate any help on this. Thanks!