Past Service and Future Service Liabilities

Discussion in 'CT5' started by Pratik, Jul 26, 2017.

  1. Pratik

    Pratik Active Member

    Hi,

    I am slightly confused with the logic for the same.
    1. PSL - This is basis the number of years that the member has been part of the scheme as of the valuation date.This as per me means the liability of the scheme if the member is to leave during the next 1 year. However when we are calculating the EPV we are using a summation of the balance number of years left too. i.e. NPA -x - 1...Why??

    2. FSL - We continue to use the same summation in the FSL too. Does this mean we are calculating the liability again?

    Request clarity as I am guessing this is a very fundamental question wherein I have got confused.

    Thanks and regards,
    Pratik
     
  2. I have tried to spell out below exactly how past and future service affect the pension liability - hoping this will help you to sort out your confusion. I shall assume the usual definition of pension: the amount of pension pa is equal to 1/60 of final pensionable salary for each year of service completed by the retirement date.

    Imagine the member is aged 60 and has been at work for 10 years. So (s)he has 10 years of "past service".
    Suppose the only retirement age is 65. By the time (s)he retires (s)he will have a total of 15 years of service: 10 will be past service, and 5 will be future service.

    The total expected pension from age 65 will be 15/60 x {Average pensionable salary at age 65} pa. The total pension liability will then be the EPV of this valued at age 60. =TSL

    The expected pension from 65 that will have been earned from past service is 10/60 x {Average pensionable salary at age 65} pa. The past service liability will then be the EPV of this valued at age 60. =PSL

    The expected pension that will be earned from future service is 5/60 x {Average pensionable salary at age 65} pa. The past service liability will then be the EPV of this discounted to age 60. FSL.

    And so PSL + FSL = TSL.
     
    Harashima Senju likes this.

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