Can someone please explain how the got that a 1% decrease in the net interest rate post- retirement results in:
a 14% increase in non pensioner liabilities
a 12% increase in pensioner liabilities.
This is a rough rule of thumb, not an exact science.
If you have an annuity generator at work, generate two annuities, one on a discount rate of say 4% pa, and one on a discount rate of say 5% pa. The one with the 4% discount rate should be in the region of 10%-15% bigger than the one with the 5% discount rate.
Also try doing this with different assumed life expectancies. The longer the assumed life expectancy the bigger the percentage, which is why a higher percentage is often used for non-pensioners (eg 14%), where there is allowance for improvements.
I though that a 1% change in the discount rate would change the active liabilities by 1% for each year of expected future working life. The future life of actives is 25 years so I though it would change the liabilities for actives by 25%. Please let me know where I am going wrong.
The above rule only estimates the effect on the liabilities post-retirement.
If the pre-retirement discount rate reduces by 1% pa as well, then the effect will be to increase the liabilities by about 1% for each year the member is from retirement.
In the example in Section 4.7, the member is 25 years from retirement and the change of 25% relates to pre-retirement.
The post-retirement switch of 14% is in addition.
Hope this helps
Best wishes
Stuart Underwood
ActEd Tutor
Last edited by a moderator: Mar 18, 2012
