Chapter 24

Question 1

List things to consider when pricing a premium or contribution

Answer 1

PRICETAG CORE
* P – Profit contributions
* R – Reinsurance costs
* I – Investment income
* C – Commission
* E – Expenses incurred
* T – Tax
* A – Assumptions from experience (use of experience)
* G – Guarantees and options – cost of
* C – Cost of capital
* O – Outcome basis – provisions for liabilities
* R – Rating adjustments for future premiums
* E – Expected liabilities (reserving basis

Question 2

Why might the premium not equal the cost?

Answer 2

• Depends on the level of competition in distribution channel
• Supply and demand
• Captive market that’s not price sensitive
• Loss-leading or marginal costing

Question 3

Why might the actual contribution rate not equal the calculated rate?

Answer 3

• Assets held are higher or lower than the accrued liabilities
• Sponsor wants to change the pace of funding (bc their fin positions is bad, there are changes in the opportunity cost of contributing, or there is a changes in the views of optimism)
• Contribution limits by legislation

Question 4

List 6 ways to fund a DB pension scheme

Answer 4

• PAYG
• Terminal funding
• Lump sum in advance
• Just-in-time funding
• Regular contributions
• Smoothed PAYG

Question 5

List the factors that need to be considered when choosing a funding method

Answer 5

SAFE STRIKE
S – Security of benefits
* A – Approaches of competitors
* F – Flexibility of contributions
* E – External factors (legislation, tax, regulation)
* S – Stability of contributions
* T – Timing of contributions (e.g. lump sum vs regular)
* R – Risk allocation (who carries the risk?)
* I – Incentives (tax or regulatory)
* K – Key party needs (members, employer, trustees)
* E – Expenses and opportunity cost