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A large defined benefit pension scheme is undergoing a formal actuarial funding valuation. The trustees have just received a valuation report from the actuary to the scheme. The report complies with UK professional standards. (1) Outline the professional requirements that would have applied in the production of the report. [3] The scheme has recently closed to new entrants. The sponsor is also considering ceasing accrual in the scheme. (ii) Explain how each of these two events might impact the Standard Contribution Rate and Actuarial Liability. [7] As part of the report the life expectancy on the valuation basis is shown for members of the scheme at age 65. This has reduced since the last valuation, whilst the life expectancy of the general population has increased. (iii) Suggest reasons why this might have happened. [3] During the valuation process the sponsor announces that its profits for this year are expected to be significantly lower than in previous years. (iv) Discuss how the trustees might react to this announcement. [9] [Total 22]A company is reviewing the pension benefits offered to current staff. It currently operates a defined benefit pension scheme and would like to offer a scheme that shares risk between the company and the member (a defined ambition scheme). (i) List eight types of defined ambition scheme that are more defined benefit in nature, and four types of defined ambition scheme that are more defined contribution in nature. [6] (ii) Comment on the effectiveness of each type of defined ambition scheme listed in part (i) in mitigating the following risks to the sponsor: (a) increased longevity (b) high salary inflation [14] [Total 20]Felicity is a fund manager who is considering investing 6 Im in a specialist investment contract where the return depends on the performance of a particular company. She has a choice between two contracts as follows: . Long contract: if the company is deemed a "success", the investment will return +100% and if it is deemed a "failure" it will return -75%. Short contract: if the company is deemed a "success", the investment will return -50% and if it is deemed a "failure" it will return +50%. Before she decides which contract to invest in, Felicity will be able to observe the investment performance of the company's shares relative to the stock market. Companies that are "successes" have a 60% probability of outperforming the stock market. Companies that are "failures" have a 40% probability of outperforming the market. (i) List Felicity's four decision functions. [2] (ii) Calculate the values of the risk function for each decision function and type of company. [6] Two thirds of such companies under consideration are known to be failures. (iii) Determine Felicity's optimal decision function. [3] [Total 11 ]
