CP1 Chapter 38 Question 3

[Saurabh Sehra]

Q38.3 - Describe how the salary increase experience of a benefit scheme would be analysed.

The 7th paragraph of the answer says that " Alternatively for each age group we could compare the average salary of all members at the last valuation with the average salary of all members at the current valuation. This should indicate the general increase in pay excluding promotional increases."

My question is if we are comparing the average salaries between 2 valuation period, how it will exclude promotional increases. As per me the promotional increase should be included. Am I missing anything here.

 

[Lindsay Smitherman]

Hi - this assumes that the average level or grade of the members (within the company's management / operational hierarchy) remains broadly unchanged.

This should be a reasonable assumption for a large enough scheme. Those leaving through retirement could well, on average, have higher management positions than those remaining. Those lower down the grade structure can be promoted to replace them, and so on. Those joining the company, and hence the scheme, are most likely to be either replacing someone who has left or will be joining at the lower grades.

It wouldn't be sustainable for a company to keep promoting everyone up a grade year on year. The co would mainly be promoting someone from a lower grade to replace a leaver or to replace someone who themselves has been promoted. But overall, you would have roughly the same proportion of staff at each grade. Everyone cannot end up being a manager!

Hope that makes sense?

 

[Saurabh Sehra]

Thanks Lindsay. Yes its much clear now.