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Sep 2016 Paper 2 - Q2(i)

K

km389

Member
Explain how the actuary should set the adjustment factors.

I basically approached this question wrong and looked at it from a contract design rather than a modelling/pricing perspective. But given that they say they give credit for reasonable things, would things like the below be worth anything?

  • A good starting point would be factors other schemes use if they have similar features
  • Need to consider how to price for members who are single
  • ... and what if they get married in the future
  • Need to consider tax implications if escalations bring a member into a different bracket
  • Adjustment factors should be set so that the cost is equivalent to the default option
  • If member retire's early, the adjustment will be less than retiring at NRA
 
km389 said:
Explain how the actuary should set the adjustment factors.

I basically approached this question wrong and looked at it from a contract design rather than a modelling/pricing perspective. But given that they say they give credit for reasonable things, would things like the below be worth anything?

  • A good starting point would be factors other schemes use if they have similar features
  • Need to consider how to price for members who are single
  • ... and what if they get married in the future
  • Need to consider tax implications if escalations bring a member into a different bracket
  • Adjustment factors should be set so that the cost is equivalent to the default option
  • If member retire's early, the adjustment will be less than retiring at NRA
Click to expand...
Yes, I think some of these points would score and so are worth making, eg the solution does talk about competitors rates.

I don't think you'd getting anything for talking about future marriages though. The member is choosing either a single or joint life pension at the date they retire. If they are single now, they won't be able to choose a joint life pension - there would be too much selection risk.

I don't think you'd get anything for tax here either. The tax is paid by the member, but we are working out what the pension scheme pays.

It's not clear whether the adjustment is bigger or smaller, it would depend on what change was being made. But if the member wanted a higher rate of escalation, then I would expect the adjustment to be bigger for early retirements as the payments will last longer.

Best wishes

Mark
 
I think that this question was hard to spot that it related to modelling - I certainly didn't pick up on this when I sat for CA1 in September. Is there a way to identify that this question related to modelling? It wasn't obvious at the time but now that I've seen something like this I'll be more conscious of watching out for these questions!

Thanks,

Fran
 
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