Deposit administration contracts and with-profits annuities

Discussion in 'SA4' started by Damo123, Sep 10, 2012.

  1. Damo123

    Damo123 Member

    Can someone please explain these in really simple terms, I don't seem to understand the point in them at all?

    Cheers
     
    Damo123, Sep 10, 2012
    #1
  2. Korach

    Korach Member

    In the good old days

    In the good old days, when pension valuations used discounted cashflow methods to value both the assets and liabilities with long-term assumptions that did not change with the market, the whole issue of matching assets to liabilities was much less critical. The guaranteed returns and the smoothed extra returns (through bonuses) of both deposit administration and with-profits were therefore considered a good match, as well as reducing uncertainty of returns. Remember, the values of both deposit administration and with-profits can only go up, not down.
    Nowadays, they are still sometimes suitable for small schemes who cannot afford unit-linked managed funds or their own investment managers, since they effectively have no choice.
    For defined contribution, they may be a good choice for individuals who are particularly risk averse and not willing to see their retirement "pot" go down as well as up.
    But the basic answer is that they exist for historical reasons only and your question is certainly in place.
     
    Korach, Sep 11, 2012
    #2
  3. Gresham Arnold

    Gresham Arnold ActEd Tutor Staff Member

    Hi Damo123

    With profit deferred annuities are old contracts - I don't believe you can buy them any more, but there are still some around, held by schemes who took them out some years ago.

    They are funding to provide a cash lump sum at retirement, although these contracts sometimes had guaranteed annuity rates written into them.

    They were popular with small schemes, since the life company would provide a bundled service of admin, actuarial and legal services and investment

    A final salary scheme could invest in these contracts. It didn't affect the calculation of the members' benefits (which are final salary and written into the Trust Deed & Rules).

    Similarly, the employer pays regular contributions and the scheme has regular valuations to determine an appropriate contribution rate, just as with other final salary schemes.

    The life company has to allocate the monthly contributions to individuals. They do this through a process of seniority purchase. But the allocation is only notional - it has no impact on the benefits.

    When a member reaches retirement, the life office compares the value of the contracts notionally allocated to that member with the cost of purchasing an annuity. (The schemes generally do buy annuities for pensioners since they are small schemes and don't want to run post-retirement risks). Money is reallocated to /from other members as necessary and an annuity purchased in respect of this member's benefits.

    As these are with-profits contracts, the value of the contracts doesn't fall and bonuses may be allocated each year.

    These contracts could also be used for DC schemes. The approach is similar to that outlined above except that now, the allocation to members is real (not notional) and there is no reallocation of assets between members at retirement - each member gets the value of the contracts allocated to them.

    Deposit administration contracts are more modern versions of with-profit deferred annuities.

    I hope this helps
     
    Last edited: Sep 17, 2012
    Gresham Arnold, Sep 17, 2012
    #3

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