Monitoring

Question 1

Membership data checks you would carry out when carrying out the valuation

Answer 1

1. Reconciliation of total number of members and changes in membership
   - making sure that all exists are accounted for under the circumstances
   - to avoid including liabilities in respect of benefits already paid
   - check fo the existence of new members
   - against employer records such as payroll
   - to ensure no liabilities are erroneously excluded
2. Check that contributions paid over the period are in line with salary data
3. Check for data fields that may not make sense
   - for example date of birth or service dates
4. Check maximum and minimum benefit levels based on the benefit design

Question 2

Why would the employer offer different benefits

Answer 2

• legislation may compel it
• there may be beneficial tax treatment
• recruiting and retaining the right staff
• rewarding good behaviours
• managing employee retirement / incentivising older workers who are less productive to leave
• controlling externalities
• reducing administration and other costs
  ( if a subsidiary of large company )
• eliminating adverse selection and asymmetric information
  ( employer know a lot about the employees - may be able to offer benefits)
• consistency across organisations

Question 3

Advanatages of terminal funding

Answer 3

• timing of contributions depends on the timing of the exists
• if no past service credits are gives and members may not transfer money form other funds - it may take decades for exist benefits of a reasonable size to uid up
• easing liquidity requirements
• better rejection of funds within the business
  Reduced opptunity cost
  If the fund outsources pension benefits - there may be no need for the fund at all
  Which can reduce the costs associated with running the fund
  Including the management time required to run a fund

Question 4

Main risk factors in a defined contributions fund that may result in failure to meet income replacement

Answer 4

• annuity risk
  ( income earned at retirement depends on annuity rate used to convert capital into income )
  ( longevity and interest rates can cause annuity prices to be unpredictable - therefore, investing in assets that closely match movements in annuity rates closes to retierement )
• investment risk
  ( investment in high quality real assets over long term will mitigate the impact of increasing benefits )
• contribution risk
  ( contributions lower than required to fund benefits at the target replacement ratio)
  ( contributions can be technically determined and increased to desired levels )
• expense risk
  (Trustees should monitor expenses and negotiate with suppliers if expenses become inappropriately high)
• funding risk
  (

Question 5

Common behavioural biases affecting default strategy

Answer 5

• paralysis
• blindingly applying heuristic rules
  Herding behaviour
  Chasing winners
  Choosing a more expense option believe it it must be better