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Sum at risk - September 2008 Paper Q.2.

K

Korach

Member
The ASET solution for Q.2. of the September 2008 paper holds to a concept that I am having trouble understanding.

The sum at risk from the possibility of an active dying before retirement is:
present value of death in service benefits
minus
past service reserve

According to the solution, though, this reserve is affected by the scheme only being 75% funded.

I understood that the funding situation is irrelevant here.

Let's say that the dependants of a member who died in service are together to receive a pension worth 80% of the past service liability.

Let's say that the scheme is only 75% funded.

The solution says (as I understand it) that the past service reserve is smaller (75%) than the dependants' pensions (80%), hence there is a sum at risk.

I would say that the liability of the scheme has decreased, the death is a source of surplus and hence there is no sum at risk here.

any insights?
oh, and good luck in the exam, everyone!
 
Just a quick thought.

The reserve held is still less than the value of the dependant's benefit. The sum at risk is this shortfall
 
Last edited by a moderator:
reply to quick thought

To call something a sum at risk suggests that the scheme is losing out.

If the member does not die, his past service is 25% unfunded, whereas if he dies, the dependants' benefit is almost fully funded. So the scheme is clearly gaining.

Any other ideas?
 
Here are my thoughts:
First the reserve depends on your assumptions and hence the sum at risk also depends on your assumptions and approach. Eg you could use many ways to reserve for the death benefits.
If death benefits are more valuable, then death would cause a strain.

Slightly more likely that pension is more valuable, given age. In this case, I agree with you that early death should crystallise a lower liability.
(I'm not sure what the ASET and examiners are trying to say but they both said it.)
Problem with 75% funding as far as I'm concerned is that of liquidity. Death in service accelerates the payment stream and "strains" the already limited asset base. Primarily invested in equities which compounds the matter. And he has a proportionately high liability, so scheme experience will be very volatile and highly dependant on what happens to him.
 
Hi Korach

The ASET solution is interpreting sum at risk as being PV of the death benefits minus the money held in respect of this member. It appears that as the scheme is 75% funded, it is holding 75% of the PSR.

The ASET solution also estimates that the PV of the death benefits is pretty similar to the PSR. So if the member died the funding level may be unchanged.

However, if the member died then, as Didster says, liquidity is a big potential issue as the payment stream is accelerated and at present the scheme doesn't have enough money to meet the death benefit/PSR. This could be a significant strain on the financial situation.

But the calculation in ASET was v much "back of the envelope". In reality the PV of the death benefits could be greater than the PSR.

So if the member died, the liabilities of the scheme would increase, worsening the funding level, as well as accelerating the payment stream.

Hope this helps
 
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