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Chp 22 Example is section 4.7

S

superbim

Member
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.


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.
 
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
 
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