(Papers) ACET Paper June 2015 "ST4 – Pensions and Other
Employee Benefits "
Q.1 Describe the scaled premium method and comment on its
advantages and disadvantages as a method of financing a social security scheme.
Q.2 In a country, all companies are required to set up a defined
benefit scheme for their employees. At the end of every financial year, the
companies are required to value the pension fund liabilities using Projected
Unit method. Regulations require that adequate assets are set aside to meet the
liabilities as determined by the annual valuation. As a measure of additional
security to the members of the pension schemes, the government is proposing to
introduce an additional regulation, which will require the value of assets of
the pension funds to exceed the amount of the liabilities atleast by 5% of the
List the merits and demerits of the government proposal. 
Q.3 A company runs a defined benefit scheme. Assets and
liabilities are valued using the discounted cash flow method. The company has
set objectives to maximise the returns on the assets of the pension fund subject
to the following criteria:
The value of the scheme assets to be at least 5% more than
the amount of the liabilities at all times.
The contribution rate over the future years should not
increase by more than 1% over any 5-year period.
Describe how asset-liability modelling techniques can be used to
set an appropriate investment strategy so that the company objectives are met.
Q.4 An employer, who has previously made no pensions provision,
has decided to set up a Defined Contribution pension scheme for its employees.
There will be a number of funds available for investing the contributions and
the member can choose between the funds. The accumulated funds at retirement
will be used to buy annuities from a pension provider.
(i) Discuss the factors to consider while setting the
appropriate contribution rates payable by both the employer and the employees to
the new scheme. (8)
(ii) Comment on the main economic assumptions to be considered in determining
the contribution rates. (7)
(iii) Describe the issues to consider while determining the types of investments
to be offered to the members. (11)
(iv) List the information which should be disclosed to members at the launch of
the pension scheme and at regular intervals. (5)
Q.5 In a country, there are a growing number of disputes
regarding the ownership of pension benefits on divorce. To avoid any ambiguity,
the government wants to introduce a new legislation to specify how the pension
should be split between the couple on divorce. The government has proposed that
the transfer value of the benefits accrued during the marriage be calculated.
This transfe r value is then split between the couple by the courts in the same
proportion as the split of the couple’s other assets.
(i) List all criteria that ideally any new legislation should
(ii) Discuss the advantages and disadvantages of the government’s proposed
method for splitting pension benefits from the viewpoint of the ex-spouse. (6)
Q.6 A large financial institution runs a non-contributory
defined benefit scheme for its employees. On retirement the employees are
entitled to a pension of 1/60th of final salary for each year of service payable
for life. The pension in payment is increased in line with price inflation.
(i) The institution is currently contemplating various
cost-cutting measures. The cost of providing pension to employees has also come
List the ways in which the company can modify their existing
pension scheme to reduce the cost to the company. (10)
(ii) The company has decided that it will close the defined
benefit scheme to new recruits. For the new recruits, it is planning to
introduce a defined contribution scheme, where the employees will have to
contribute 5% of their salary and the company will contribute an equal amount.
On retirement, the accumulated fund will be used to buy an annuity from a
For existing members, past accruals of pension are preserved.
However for future accruals an existing member will have to choose one of the
following three options:
The employee can stay with the defined benefit scheme and
retain an accrual rate of 1/60th for future service by making a contribution
5% of future salary.
The employee can stay with the defined benefit scheme and
choose not to contribute, in which case, the accrual rate for future service
will be reduced to 1/80th
The employee can leave the defined benefit scheme and join
the defined contribution scheme, where they will be subject to the same
rules as the new recruits.
Discuss the various issues that the existing members should
consider before making the choice. (10)
Q.7 A company runs a defined benefit pension scheme. On
retirement, the benefit to the employees include the following:
A lump sum of 3/100th of final salary for each year of
A pension of 1/100th of final salary for each year of
service payable for life and a contingent spouse’s pension of 50% of the
member’s pension. The pension increases in line with increases in the retail
On leaving service before retirement, the members are entitled
to a deferred pension which receives increases of 5% or price inflation if less.
Currently there are 500 active members. There are also 2,000 former employees
entitled to deferred benefits and 25 former employees with pensions currently in
The company is about to carry out a valuation for the purpose of
assessing the ongoing funding position and determining the contribution rate.
Assets and liabilities are to be valued using the discounted cashflow method.
You are an actuary and the company has appointed you to carry out the exercise.
(i) List the demographic assumptions you will need to make. (5)
(ii) Discuss how you would choose the demographic assumptions. (6)
(iii) List the economic assumptions you will need to make and explain the
interrelationship between them. (6)
(iv) List the information you will need to support the economic assumptions you