For the past service liability in this question, I can't quite see why we haven't based it upon the projected FPS but their current FPS? In the previous question 4.9, we based past service liability on projected FPS. Thanks in advance!
Q14.9 is valuing a pension from a final salary scheme. This means that the current salary should be projected forward to retirement (using a salary scale), to give the Final Pensionable Salary on which the member's pension will be based. Q14.14 is valuing a pension from a career average scheme. In this type of scheme, the pension at retirement is 1/60 of average salary over the member's working lifetime for each year worked, with no revaluation of earlier years salaries up to retirement. This is equivalent to a pension of 1/60 of total salary earned e.g. if the member has n years service: Pension = (n/60)*(average salary) = (n/60)*(total salary/n) = (total salary)/60 (In reality, many such schemes do allow for revaluation of earlier years' salaries up to retirement. Such schemes are known as career average revalued ("CARE") schemes. But we don't need to worry about that here.) So in Q14.14, the past service liability is just based on the total past earnings with no allowance for salary scale. The future service liability is based on earnings in future years - so does allow for salary growth up to each year of working considered. Hope this helps you out. M.
Thanks Mark. Isn't this underestimating the past service liability?? Have there been questions like this in the past and do they explain they want the past service liability should be calculated?
No, we're not underestimating the past service liability. It's not absolutely clear why you think we are... Perhaps it's because I said that the past service liability is based on total past earnings with no allowance for salary scale. If so, read on! The pension put into payment at retirement is (Total Salary earned over the working lifetime of the member)/60, as I said. So we can split the total salary down into that earned in the past and that to be earned in the future. When calculating the past service liability, we use the total salary earned in the past. We know this FOR CERTAIN, as we have data about what the member earned in previous years. Here we are told that total past earnings are £290,570 over 13 years. This will automatically include any salary growth that the member achieved over the period, as it is the sum of the salaries earned in those 13 years. (Think about your total past salary earned since you became an acturial student.) We do not need a salary scale (i.e. an assumption about how salaries grow) as we know the salary growth exactly for the past. For the future service liability, we need the total salary to be earned in the future. Since we do not know this, we need the salary scale to allow us to calculate the expected salary to be earned in future years. Hope this helps! After all this.... You may be pleased to note that the only exam question I can find that asks about a pension based on career average earnings (rather than a pension based on salary at or just before retirment) is Subject 105, September 2001, Q5, which considers a new member to the scheme, so there is only a future service liability to worry about.
