Chapter 27

Question 1

How can a surplus arise on a DC fund?

Answer 1

• Fraud
• Operational risks = maybe like decimal errors, system errors
• Could pay someone too much or too little
• Expenses> charges, so higher than anticipated
• Errors in contributions, over or under contribute
• Unallocated deposit reserve
• Systematically round down investment returns then surplus would go back to member

Question 2

How can a surplus arise on a DB fund?

Answer 2

1. Better Investment Returns
   
   • Fund assets grow faster than expected.
     2. Lower Benefit Payments
   • Members die earlier, withdraw before vesting, or take smaller pensions.
     3. Higher-than-needed Contributions
   • Employer/employee payments exceed what’s actuarially required.
     4. Lower Salary Growth
   • Benefits based on salaries cost less if salaries grow slower than expected.
     5. Conservative Assumptions
   • Past assumptions (e.g., inflation, mortality) overestimated liabilities.
     6. Demographic Gains
   • Fewer members qualify for high benefits than projected.
     7. Changes in Assumptions
   • Updates to actuarial basis (e.g., lower inflation or longer discount period) reduce liabilities-