Managing Experience : Chapter goals (from syllabus)
Chapter goals (from syllabus)
- Identify sources of surplus/deficit (experience vs assumptions; finance vs demographic).
- Discuss factors affecting treatment of surplus/deficit (who has rights, prudence, law).
- Describe pace of contribution adjustment (spread, immediate injection, taxation, cashflow).
List sources of Surplus/deficit
SOURCES
S — Scheme experience variance (assumptions vs actuals)
- Asset returns differing from expected (investment out/underperformance).
- Liability experience differing (retirements, withdrawals, mortality).
O — Opening funding method / valuation basis
- Choice of funding method (PUA, EAM, AAM) can create expected surplus/deficit.
- Change in basis (e.g., switch to market-consistent) can create measurement differences.
U — Under/overpayment of contributions
- Delayed or insufficient employer payments; late payments; admin errors.
R — Regulatory / legislative & scheme changes
- Statutory indexation, tax rule changes, changes in benefit entitlements.
C — Change in assumptions or methods
- Different discount rate or mortality assumption at revaluation.
E — Experience on member options & take-up
- Higher than expected lump sum take-up or early retirement choices.
S — Special items / one-offs
- Sponsor contributions, asset transfers, bulk transfers, buy-ins / buy-outs.
Considerations in application of surplus or deficit
Use of Surplus/deficit - APPLY O
A — Allocation rules & legal rights
- Who legally owns surplus?
- Trustees’ duty and scheme rules
- employer rights in some jurisdictions.
P — Prudence & fiduciary duty
- Trustees must be prudent: deficits often require quicker action than surpluses.
P — Purpose & objectives (of stakeholders)
- Trustees (security), sponsor (affordability), members (benefit certainty) — balance these.
L — Liquidity & cashflow implications
- Can sponsor afford a cash call? Is refund tax efficient? Consider payroll timing.
Y — Yield & opportunity cost
- Consider investment performance upside/loss—timing matters for whether to spend surplus.
Ongoing/coming to an End
Use of Surplus
- Reduce EE/ER conts- surplus basis?
- Refund to ER -Scheme rules, legislation, tax
- Risk Reduction :
- adverse future exp,
- inv strategy,
- strengthen funding basis/target
- buy longevity swaps, buy in/out, removal of liab CETV and commutation - Increase benefits
Considerations in removing Deficit
- trustee and ER agreement on recovery plan
- DRC: % of sal, monetary amount
- Reduction to benefits - CETV, member options
- Reducing or ceasing future accrual
- Weakening the basis
- Risk reduction- if surplus on BE basis -> CETV
Factors affecting pace of spreading of surplus/deficit
Pace of adjustment → PACE
P — Period (length of spreading)
Options: immediate cash injection; spread over X years (e.g., average working life), or level amount.
A — Amount & method
% of salary, monetary amount, inflation-linked increases — choose method to suit objectives.
C — Conservatism (prudent speed)
Deficits often corrected faster than surpluses (to protect members).
E — External constraints
Tax rules, accounting recognition, sponsor affordability and legal limits.
