How discontinuance of DB scheme works

[studentactuary15]

After attempting CP1, P2, September 2019, 1iii, I realised my understanding of how discontinuance of DB works is very limited! In this Q the DB has stopped service and the scheme was in a deficit at time of discontinuance. The members in the DB scheme were transferred to the Dc scheme. Insurer is paying off the deficit for the next 10 years.

The recent years showed that the deficit increased. The question asks for how this happened...

What exactly are they paying back for the deficit? I don't really know this so it is hard to answer how the deficit has increased. Is it stuff like legal/actuarial expenses, pensions in payment, members’ voluntary savings, early leavers’ savings, benefits for active members?

Is there a numerical example that can be given for if a policyholder is transferred from DB to DC and what the insurer would need to pay for the deficit?

Thank you in advance!

 

[Helen Evans]

Hi
Thank you for your post. The scenario in the question is that a DB scheme has been in operation but closed 5 years ago. Members have then joined a DC scheme for their future service. Re the DB scheme, it provides formula driven benefits (eg based on final salary) and if there are insufficient assets in the scheme to meet the expected cost of the liabilities then we say it is in deficit. Even though members have joined the DC scheme to accrue future benefits, the DB scheme is still responsible for providing benefits that accrued up to 5 years ago.

As an example suppose a member joined the company and DB scheme 10 years ago. They will have accrued 5 years of benefits in the DB scheme at which point they moved to the DC scheme and have had 5 years setting aside money to provide benefits in the DC scheme.

We are told that 3 years ago the DB scheme was in deficit. So the company will be aiming to remove that deficit so that the scheme has sufficient money to provide the benefits that members earned in the DB arrangement. Commonly a scheme is in deficit because it has had poor experience relative to the assumptions made when funding the scheme (and a number of points on the schedule relate to this idea). For example, poor investment returns or light mortality (so members live longer than expected and so pensions are paid for longer). The company's deficit reduction contributions do not seem to be enough and this is suggesting that experience continues to be poor and therefore the deficit is not reducing as quickly as expected.

I hope this helps with your understanding.

Helen