commutation

Hi

In C20 summary says 'a cautious basis will produce generous conversion terms'.

I thought cautious means not to penalise the scheme/sponsor too much so such a basis will produce realistic/optimistic terms (ctev basis say) as opposed to generous (high commuation factors - eg funding basis).

Have I got the wrong end of the stick?

 

A cautious basis is on the pessimistic side - so liabilities are more likely to be overstated than understated, funding level likely to be understated, and contribution rates overstated.

This is all well and good for funding, but is not necessarily appropriate for benefits that depend on assumptions, eg commutation, transfer values, since they would result in higher than realistic values.

In essence, the use of cautious assumptions sets some fund aside for bad experience, and paying benefits on this basis crystalises that bad experience which is worse than realisitically expected (on average).

 

All understood Didster

So I suppose my question is there term cautious for option terms is not the normal cautious we refer to when talking reserving - it is essentially the reverse?

If this is so then the statement 'a cautious basis will produce generous conversion terms' does not make sense to me......

 

Just had a read of chapter 20.

Not sure what YOU mean by the NORMAL cautious?

It's not a term I use regularly but if I remember correctly from CA1 (I think), it's usually used to mean slightly on the prudent side of realistic.

Optimistic < Realistic < Cautious < Prudent (for liability values).

This is consistent with "a cautious basis will produce generous terms" since liability values are higher than realistic and this is what you pay in cash now.

However, there seems to be a bit ambiguity of the meaning of cautious (I suppose similiar to the meaning of prudent (standard/accounting)). Pg 23 of chapter 20 says that
"The use of a realistic (or even optimistic) basis will result in terms that are less generous to the members - this may be described as "cautious" from the trustee's perspective since more money is retained in the scheme to provide benefits".

Perhaps this is what you consider the normal meaning of cautious but note it is less generous to members.

So I suppose there is no correct answer as to what cautious means.