Objective of Pension, Life and General Insurance Companies Flashcards Preview

5. Client Advice > Objective of Pension, Life and General Insurance Companies > Flashcards

Flashcards in Objective of Pension, Life and General Insurance Companies Deck (16)
Loading flashcards...

UK Institutional Investors affect on Retail Investors

Indirect investment through an institution is now the most popular way for retail investors to invest

Allow investors to purchase stakes in large, well-diversified portfolios they would be unable to access


Pension Fund - Two types

Defined Benefit
- sponsor to pay member benefits equal to a proportion of salary at retirement (final or average) subject to members years of service.

- Occupational only (sponsor is employer)

Defined Contribution
- contributions are used to buy investments, the return on these investments determines the pension benefits

- Occupational or Personal


Advantages / Risks of DB

Member - advantage of certainty of benefit

Sponsor - risk of meeting this benefit lies with employer / sponsor

Calculation example: 1/80 scheme, £50k final, 40 year contributions

(50,000*40)/80 = £25k p.a until death


Advantages / Risks of DC and Annuities

Member - bears risk of meeting pre-determined level of benefit so advantages for the employer / sponsor

However, an ‘Annuity’ can be entered into to give certainty of benefit during retirement

If individual dies before 75, they can leave DC pension to anyone tax free. After 75, lump sum (55%) or income (25%) will be charged on recipient


Pension Fund - Reasons for switch to DC

1. Increasing Longevity - therefore increasing costs to scheme
2. Increasing Pension Deficits - partly by longevity but also falling returns on assets held


Pension Fund - Strategy for DB schemes in Deficit

- switch from equities towards bonds (reliable returns and ageing members want certainty of cash flows)

- Liability-Driven Investments (LDI) which switch to bonds and use swaps / derivatives to match assets to liabilities

However, using these LDI strategies simply locks in the deficit, so some use partial to mitigate deficit, whilst keeping equities to reduce it


Pension Fund - Tax Position

+ Contributions from individuals receive Income Tax relief

+ accumulated interest and Capital Gains are not liable to taxation

+ Part of proceeds (25%) are available as a tax-free PCLS

- However, pension income is liable to income tax


Pension Fund - Occupational Scheme Trustee's Role

Appointed to ensure the fund managers are acting competently to meet the future liability stream

Determine strategy of fund and asset allocation


Pension Fund - Asset Class Distributions

Largely long term liabilities (large % equities)

AA depends on maturity. Funds with employees nearing retirement, need more liquidity and certain cash flows (fixed income)

DC schemes with Annuity businesses require certain cash flows (fixed income)


Pension Fund - DB vs DC calculating Asset Allocation

- DB focuses on maturity of plan (mature = more liquid)

- DC also uses employer turnover rate (high tech company requires high liquidity for turnover)


Pension Fund - Growth by Dividend vs Capital Gains

Despite not having to pay CGT, pension fund managers may prefer to receive Dividend Income

Adjusting a portfolio by realising gains incurs transactions costs (through purchase AND sale of securities)

Where as re-balancing with dividend or coupon income, ‘costs will only be incurred on the purchase’


Pension Fund - Pound Cost Averaging

Due to pension funds ‘regular flow of income’, assets may be bought at market peaks and troughs

Using PCA, fund manager can pay the 'average price' of the asset


Life Assurance - Term vs Life Definition, Asset Allocation

Term assurance - covers life over a specific period instead of a capital sum on holders death

Since liabilities are long term in nature, portfolios are matched and illiquid


Life Fund - Tax Position

- Investment returns subject to BOTH Income and CGT, therefore life fund managers use a strategy to minimise tax they pay on their funds

- Life assurance premiums are paid by policy holders out of post tax income

+ Some policies can be 'qualifying', which means proceeds of policy are not taxable (contrasting to Pension where income is taxable)


General Insurance - Definition, Asset Allocation

Provide cover against specific contingencies (fire, theft etc) over fixed period (usually annual)

Since liabilities are short term, GI companies pool premiums into reserves (usually highly liquid short term securities)


OEIC and Unit Trusts (unrelated to section)

Open ended, therefore fund manager can create new units or shares to meet demand
Price of unit / share depends on NAV
Dividends can be paid as income or reinvested
Unit Trust = governed by law
Quote bid and offer price

OEIC - company law, makes investors owners (shares)
Only one price