Risk benefits and current cost funding

Discussion in 'SP4' started by CLK, Sep 19, 2020.

  1. CLK

    CLK Member

    Risk benefits seem often to be funded for using a current cost approach.
    I understand this to mean that the required contributions in a given year would be determined as the expected cost of the relevant benefits in that year.
    With respect to insured benefits, this is straightforward since the contribution is the premium required by the insurer.
    If a retirement fund self-insures its risk benefits, for instance using a risk reserve, then why would it adopt a current cost approach?
    I would think that this could probably be because the expected cost of the self-insured benefits in a single year would usually be small: the probability of death for in-service members is low and it is only the excess of the death benefit over the actuarial reserve that would need to be covered by this additional risk contribution.

    To aid my understanding, a partially-related question:
    How should a lump sum that is independent of pensionable service and payable on retirement be funded for under the PUC method?
    If the PUSCR is calculated for a single member with a one year control period, then I would expect the entire cost of the lump sum to be deferred to the year before retirement.
    Is this appropriate?
    If the membership is stable and spread over the possible ages, then the cost of the retirement lump sums would at least also be well spread.
    The fund could conceivably also adopt a different funding method for each different benefit based on what is deemed appropriate given the fund’s membership profile and benefit structure.

    Could someone perhaps let me know of common practice in the industry or any intuition that may help my understanding of the above?
     
  2. Justine Peggs

    Justine Peggs ActEd Tutor Staff Member

    Most defined benefit schemes in the UK are now closed to future accrual. Even when they were open, and for those which remain open, non-accruing retirement benefits are not common in the UK and so it's difficult to say how the PUM would commonly be applied in practice.
     
    CLK likes this.

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