"For example, a prudent funding basis for a retirement income benefit may assume low mortality. This assumption would not be cautious when used to calculate terms for members commuting part of their pension for a lump sum." Can anyone please explain this? Thanks
Essentially, a prudent basis sets aside a bit more to cover the liabilities, so the extra can offset bad experience etc. The funds set aside will pay the benefits and a surplus should arise in long term. If you use the same basis to pay commute a pension for a lump sum, you're locking in this higher amount now and paying it now. It's paid so experience can't change. So the lighter the mortality, the larger the benefit paid, larger cost to plan, the opposite of what you tried to do by using a "prudent basis"
