Core reading says for closed fund all estate will be distributed in the future therefore the working capital is zero. RCM can be made zero through management action therefore the realistic surplus is zero. Does that mean Peak 1 surplus is also zero as it cannot be higher than realistic surplus? Is this allowed? Thanks
Yes, this means we have a Peak 2 surplus of zero and hence the WPICC is set so the Peak 1 surplus is zero too. Normally we'd be very worried if surplus was zero. The slightest piece of adverse experience would tip the insurer into insolvency. However, zero surplus is fine here because of the management actions. The firm will have a large excess of assets over asset shares. Adverse experience will reduce both assets and asset shares, but the management can respond by cutting bonuses or changing investment strategy to ensure that the guaranteed payout never rises above the assets available. So bad experience leads to a fall in assets, but also a corresponding fall in the with-profits benefit reserve or future policy related liabilities. Hence the surplus remains at zero. We get a similar but opposite effect if experience is good. With open funds we do not intend to distribute the current surplus to the current policyholders, so we do not apply the logic above. Best wishes Mark
