Core reading example 1 chapter 31 - assumptions for a annuity projection

[ST6_aspirant]

Part (i)
Why are expenses of the contract an assumption?
Are the expenses not taken account of by a charge on the fund (maybe a fund management charge) that is pre-determined and already told to the member?

Why is future inflation an assumption?
The fund will earn whatever is the investment return expected (outlined as an assumption in the solution).

 

[Lindsay Smitherman]

Hi - these are good questions!

Yes, "charges" is the right way to think about these "expenses". But they are not necessarily fully pre-determined as they may not be fixed (they could be variable) and they may not be the same for every fund (and the individual may be able to switch between funds). So they therefore require an assumption to be made rather than being fully known in advance.

Re future inflation: yes agree with what you have said. But a separate future inflation assumption would be needed if the charges are specified as an amount per contract (rather than a % fund) and that amount increases in line with inflation. Future inflation may also be taken as a starting point for the salary growth assumption. And it can also impact the annuity rate terms if the preferred annuity form is index-linked.

Hope that helps.

 

[ST6_aspirant]

Yes that helped, thank you for the explanation and encouragement on asking good questions