Oct 2007 Q2 - FRS17

[didster]

Just trying to figure out if I have FRS17 (and by extension accounting cost in general) calculations all wrong. It's a bit last minute I know but any responses in time for the exam on monday would be appreciated - if not, it should help for future exams anyway (either myself on a resit or someone else).

The main problem I had was with the service cost calculation. I would have fallen into the "number of candidates who got confused between Company Service Cost and actual Company contributions" even though I know the difference.

The Service Cost is the cost of one year's accrual on the FRS 17 method (Projected Unit) which may differ from the actual contributions paid because of:

• Funding method/basis different from FRS17
• Actual contributions adjusted for surplus/defict/requirements of Rules

But in the absence of anything suggesting one of these, is it not appropriate to assume that Company is paying contributions in line with service cost?

Even if I accept that we need to use last year's service cost to estimate this year's, I am not happy with the roll forward.
Both the examiners and ASET roll (Last years service cost plus estimate of member's contributions) with the discount rate.

I think it should be rolled forward with salary increases because of the following.

Say the SCR is X% of salarys which are Y at 2005.
At 2006, salaries increase to (1+s)Y if salary increases are at s%
If the basis is stable, the SCR will still be X% but based on salary of (1+s)Y

ie Service cost is now (1+s) higher, not the discount rate.

Anyone see any flaws in this reasoning?
I note that the actual numbers aren't affected too much (eg my approach on actual contributions is more or less the same number as last service cost with 1 year salary increases), so I assume that the method is what gets marks.

Finally, are there usually marks for reconcilliations/checks or are these just for your benefit to find errors?

 

[olly]

FRS17 Qn

The DB scheme is closed - meaning that the PU cost from last year (FRS or Funding basis) needs to be unwound for one year - i.e. remove one yr discount and one yr salary growth. So the Sal growth assumption cancels out the actual sal increase giving a neutral result. There may also be an alowance for a withrdrawal decrement in the same population.

 

[Alpha9]

I should be very wary about assuming that the service cost is what the company contributed. Or, to put it more bluntly, don't!

I deal with quite a few schemes where, whatever the actuary says the employer should contribute (on whatever basis), they don't - for instance they might suddenly come into some cash and make random overpayments. And then perhaps use those overpayments to underpay in the future... It gets messy!

Essentially you need enough information to be able to calculate the service cost independently. Unless you (only) know how the company contributions advised were calculated, on what basis, and how that compares to what they actually paid, and you can therefore adjust it (thereby probably giving you a different answer), you shouldn't need to know the actual contributions. Even if it's the same answer, you won't have assumed it's the same, you'll have calculated it's the same.

Good luck!

 

[didster]

Thanks for your responses.
It makes sense now.