Pensions

Question 1

3 Types of retirement provision

Answer 1

• Private Individual Arrangements
• Occupational Retirement Funds
• State Provision

Question 2

3 Important Variables

Answer 2

• Interest / investment return
• Inflation
• Annuity rates (i.e. future interest and mortality rates)

Question 3

5 Benefit Structures

Answer 3

• Spouses Annuities
• Death Benefits
• Ill-Health Retirement
• Withdrawal Benefits
• Flexible (or living) Annuities

Question 4

5 Reasons for Employers to sponsor retirement provisions

Answer 4

• Business objectives: attract and retain good staff
• To take advantage of favourable tax treatment
• Paternalistic motive: rewarding loyal or key staff, caring for those in need
• Pooling of expenses and expertise
• The employer may be part of a multi-employer group that provides retirement benefits.

Question 5

4 Characteristics of defined benefit funds

Answer 5

• Retirement benefit guaranteed according to a formula determined in advance,
• Members are allowed to exchange up to a third of their pensions for a cash sum at retirement
• Commutation factor depends on “value” of pension at retirement
• Increasing mobility of labour complicates matters

Question 6

Risk distribution in DB vs. DC funds

Answer 6

DB funds: sponsor takes on greater risk, paying higher contributions when investment returns are poor or annuity rates increase
DC funds: member faces greater risk, receiving a lower pension when investment returns are poor or annuity rates increase.

Question 7

Role of the Actuary in Defined Benefit funds

Answer 7

To determine/approximate the level of contributions required to sponsor guaranteed benefits. This is a very complicated calculation.
- Legislation requires an actuarial valuation of DB funds every 3 years

Question 8

Role of the actuary in Defined Contribution Funds

Answer 8

To predict benefit to be expected from a given level of contributions. May also give advice on a suitable investment strategy, as well as the matching of assets and liabilities.

Question 9

Pension

Answer 9

A series of payments which can be valued at retirement using an annuity.

Question 10

Flexible / living annuity

Answer 10

Annuities that allow members to choose the level of the pension they receive each year.

Question 11

Defined Contribution Fund

Answer 11

Money Purchase Schemes. Contributions are paid into the fund, normally at a fixed percentage of the members salary. An individual account is held for each member.
The account accumulates with investment returns until the member reaches retirement. The amount in the account will depend on investment returns.

Question 12

Defined Benefit Fund

Answer 12

Final salary fund.
Benefits that a member receives are based on a formula that is defined in advance.
Most common in SA is a final salary scheme.

Question 13

Role of actuarial valuation

Answer 13

• Certify that proper records have been kept for valuing liabilities
• Proper provision made for liabilities
• Assets & liabilities have been valued according to legislation, setting out methods and assumptions
• Assets & liabilities have been valued consistently
• The difference in assets and liaibilities have been stated
• Contributions are adequate to meet future commitments
• Professional guidance has been complied with.

Question 14

Benefits to fund members (tax-wise)

Answer 14

• Deferral of tax
• Tax-exempt part of retirement lump sum
• Lower marginal tax rate on pension

Question 15

4 Points on the EET system

Answer 15

• Employee contributions are tax exempt
• Investments accumulate tax free
• Benefits are taxed when payed
• Withdrawal benefits are taxed heavily to encourage preservation

Question 16

How much of the members’ salary can be contributed exempt from tax

Answer 16

7.5%

Question 17

How much of the members’ salary can the employer contribute exempt of tax

Answer 17

20%

Question 18

Funded State Pension

Answer 18

• Monies set aside before benefits are due

Question 19

Pay-as-you-go state pension

Answer 19

• Benefits paid from tax revenue as they fall due

- Difficult to change to funded approach

Question 20

SOAP

Answer 20

• Unfunded & non-contributory
• Flat rate
• Means tested
• Subsistence pension

Question 21

UK-system pension

Answer 21

• Flat rate
• non means-tested
  subsistence pension

Plus:
- unfunded
- Defined benefit
- Compulsory contributory
Earnings related pension

Question 22

Chile system pension

Answer 22

• Funded
• Defined contribution
• Compulsory
  Earnings related pension

Or a subsistence pension for those not covered by the above.