Hi, I am going through the questions in the last part of chapter 18 but am having difficulty in relating the questions to the notes. For Question 18.14 (iii) (a) & (b) I cannot seem to get the same answer if I apply the formula in section 3.4. It seems that in the acted question you have split out the difference between the interest gained during the year from interest in the year and then interest made from surplus that we had at the beginning of the year using the 5% IR rather than 20%. Sometimes the valuation interest is used and other times the actual interest is used .... HELP. I can see where you have come from in the question but could you help me relate it back to the formulae? I will be going on a tutorial soon that should help but I would like to be in a better position if possible. many thanks -
More than one way to skin an analysis of surplus question Hi (1) First of all, I wouldn’t be too worried about not getting having an answer that ties in exactly with the formulae given in the Core Reading (CR). These formulae are really there as EXAMPLES to help illustrate how you’d calculate the various components of a surplus. Rather than being formulae that you need to rote learn, it’s more important that you can understand the material so that you can work or how to do an AoS for a given situation in the exam, which of course might be different from the situations given in the Notes. Consider Question 18.14 as splitting the surplus into three parts asked. Note that it’s asking you to calculate item (b) (Expected inv return on last year’s surplus) separately from investment surplus, whereas the CR formula gives you total investment surplus, including that arising from the last year’s surplus. So, a slightly different approach has to be considered to get this split. Ours is only one such approach. (2) Your concerns about which interest rate to use. Remember we’re working from actual to expected in this question. In our solution, part (a) (28.94) deals with the surplus due to investment return being 20% rather than 5% based on the actual assets held at the start of the year (which were 200). However, there is also a contribution to surplus arising during this year, due to the fact that there was a surplus at the start of the year (of 95.12). Part (a) has already dealt with the “investment gain (of 15%)” on this surplus (because it used assets), but there is also the 5% “expected” interest on this surplus. So we must only use 5%, otherwise we will be double-counting. It is no coincidence that this is exactly what you were asked to calculate in the Question for part (b)! Similarly, we must use the expected int rate of 5% in part (c). Easiest way to think of this is to switch one item at a time (from actual to expected) as you move from actual to expected. It might help you understand a bit better if we were to consider a slightly different question - if you were asked for the ACTUAL investment return on the surplus. You would have to do this first. This would be 20% of 95.12 = 19.02. The investment return surplus would then need to be calculated assuming that there was no surplus at the start of the year, (i.e. assets are equal to liabilities=104.88), because all of the interest on the surplus at the start has already been included in the 19.02 above. You might like to check that the difference between assets at the end of the year (using 20% and 5%), is 14.67 (I think!). This gives a total investment surplus of 33.69, which is the same as the sum of parts (a) and (b) in our soln (bar rounding). (3) Tying in ActEd soln with CR formula. The actual investment income on the assets would be approximately, 20% x 200 – 0.5 x 20% x 15 = 38.5. This is interest on assets at start of year less half a year’s interest on the actual expenses. The expected investment income on the assets is approximately, 5% x 200 – 0.5 x 5% x 15 = 4.87, by same logic, but this is explicit in the formula. Sum is 33.61. The difference between this and the 33.69 we get is entirely down to us applying compound interest to the expense outgo, but the formula just applying half a year’s (simple) interest. You’re very wise going through the Questions in the notes, because they are showing you different ways of tackling such questions. May be down to personal preference at the end of the day. We’ll certainly cover this (possibly in a bit less detail ) in the tutorial, but I hope this helps. Best of luck Steve
