CT-5 CH11 Pension Fund Restricted Age commutation

[Sunil Sanga]

Hi,

In attached example restrictions apply till age 55 and ill health benefits start getting paid after age 55. But I am totally confused with commutation used in this example.

I am assuming that for past service liability we don't use bar over M and for future service liability we do use bar over M.

In this example benefit getting paid from age 55, so this would be future service liability. Please confirm.

Also please suggest why bar is not used on M?

Regards,
Sunil

 

[Robert Chadburn]

No, this is not a future service liability. For this pension, the person is getting their maximum service of 40 years, regardless of the when they retire. That is, their pension from retirement at any age will be 40/60 (= 2/3) of their final pensionable salary at that age.
To work out the EPV of this (or any unusual benefit) you may need to go back to first principles - ie derive the formula from scractch, using EPV = sum of {amount} x {discount} x {probability}. I have written the first few lines of this derivation in the attached. Look at this carefully. Come back to us if still doesn't make sense.
Robert