C19 - Valuation Considerations DONE

Question 1

Purpose of a valuation for sponsor and other requirements members, shareholders or regulator may have

Answer 1

To provide an assetment of the financial position of the scheme

Other requirements are:

• determine contributions
• provide figures for accounts
• assess the security of benefits eg comparing vs buyout
• provide standardised info to regulator
• Use in negotiations when a business is bought/sold

Question 2

Factors affecting the approach to the valuation

Answer 2

• Purpose
• Consistency
• Views of sponsors and trustees
• External factors eg legislation
• Financial significance
• Specific scheme circumstances eg open, maturity, investment strategy, covenant

Question 3

Why best estimate may not be appropriate

Answer 3

The reasons why a value is to be determined or needs of the client may suggest another value should be calculated

Question 4

Setting assumptions for a cash transaction ie one off payment between two parties

Answer 4

Best estimate, as deliberately under/over stating will have a direct financial effect on the two parties

Question 5

Employer objectives in relation to cost of the scheme

Answer 5

• Stable contributions
• Flexibility eg other capital requirements
• Pay no more than is necessary, so may prefer realistic assumptions
• Avoid unexpected large increases in future contributions
• Financial obligations that arise in the short and long term
• Ability to reclaim surplus

Question 6

Two conditions to which trustees may be flexible in timing of contributions and choice of funding method

Answer 6

• Adequate level of security maintained

- Confidence in the ability of the employer to support the scheme in the future

Question 7

Basis for valuation for the sponsors accounts

Answer 7

Ongoing basis with best estimate assumptions, with a need to reflect the relevant accounting standards

Question 8

Assumptions that the actuary may demonstrate the sensitivity of the results

Answer 8

• investment return underlying the discount rate
• price inflation
• base mortality and allowance for improvements
• other demographic assumptions if they are financially significant

Question 9

Benefits to be valued on discontinuance

Answer 9

Usually the guaranteed benefits under the scheme assuming members in pensionable service leave immediately eg become deferred, refund of conts, receive no benefits, depending on the terms and legislation

Consider options or guarantees available to members as can have a material impact on the cost of securing benefits, particularly when insuring

Question 10

Considerations for a buyout valuation, if quotes are not available

Answer 10

Assumptions would be based on actuaries view of the cost of securing benefits in the insurance market:

• estimate of the assumptions underlying premium rates at val date (often based on yeilds available on mixture of high quality bonds and government securities)
• valuing options and guarantees under the scheme on a worst case scenario with additional premiums for any options which may lead to additional reserving even if the terms themselves are not generous
• including an allowance for expenses

Question 11

Reasonableness checks on valuation results

Answer 11

• development of funding position since last valuation, taking into account key factors affecting the scheme and changes in assumptions used
• data checks
• ensuring the valuation of specific key benefits for large groups of members is consistent with heir average age and previous valuati