Subject SA4 - ActEd Upgrades/SA4 CMP Upgrade 09-10.pdf · Subject SA4 CMP Upgrade 2009/2010 Purpose...

SA4: CMP Upgrade 2009/10

The Actuarial Education Company © IFE: 2010 Examinations

Subject SA4

CMP Upgrade 2009/2010

Purpose of the CMP Upgrade This CMP Upgrade lists all significant changes to the Core Reading and the ActEd material since last year so that you can manually amend your 2009 study material to make it suitable for study for the 2010 exams. It includes replacement pages and additional pages where appropriate. Please note that this document is about 70 pages long. You may prefer to purchase a hard copy (at minimal price) if you do not wish to print the download version. Alternatively, you can buy a full replacement set of up-to-date Course Notes at a significantly reduced price if you have previously bought the full price Course Notes in this subject. Please see our 2010 Student Brochure for more details.

This CMP Upgrade contains:

• All changes to the Syllabus objectives and Core Reading.

• Changes to the ActEd Course Notes, Series X Assignments and Question and Answer Bank that will make them suitable for study for the 2010 exams.


© IFE: 2010 Examinations The Actuarial Education Company

1 Changes to the Syllabus objectives and Core Reading

1.1 Syllabus objectives

There have been no changes to the syllabus objectives.

1.2 Core Reading

Chapter 1 Page 11, Section 3.2 The direct links to GN24 and GN48 have been removed. Page 14, Section 3.4 The reference to: Pensions Pocket Book 2008 NTC Publications Limited in association with Hewitt has been changed to: Pensions Pocket Book 2009 Economic and Financial Publishing Limited in association with Hewitt Chapter 2 Page 4, Section 1.1 The paragraph at the bottom of the page has been updated to: The full basic state pension (BSP) payable during the 2009/2010 tax year is £95.25 per week. A married person may claim a higher basic pension in respect of a spouse who does not claim a separate basic pension. The married person’s pension for 2009/2010 is £152.30 per week. A widow or widower may also claim a basic pension on the death of a spouse who had made or been credited with contributions.



Page 8, Section 1.1 The core reading in the second and third bullet points relating to the earnings bands for S2P has been amended to:

• Band 2 above the level of that tax year’s LET but below that tax year’s middle earnings factor (MET – which approximates to (3 × LET – 2 × QEF)). The current accrual rate is 10%.

• Band 3 above that tax year’s MET but below that tax year’s upper earnings limit (UEL). The current accrual rate is 20%.

The following sentence has been updated with the appropriate figures for the 2009/2010 tax year and now reads: The QEF is equal to the lower earnings limit and for 2009/10 is £4,940. The LET for 2009/10 is £13,900. The UEL for 2009/10 is £43,888. The last paragraph of Core Reading at the bottom of the page has been amended to: From 2009, changes are being phased in to reform S2P into a flat-rate top-up to BSP. Band 1 accrual will be replaced by a flat-rate accrual. From 2010, Bands 2 and 3 will be merged and accrue at 10% and the UEL will be fixed so that this band will disappear once the UEL is overtaken by the MET. Page 15, Section 1.3 The last sentence of Core Reading has been amended to: From October 2001 the majority of employers have been required to provide access to either an Occupational or a Stakeholder scheme for their employees. Pages 18/19, Section 1.5 The following sentences have been deleted at the bottom of page 18 and top of page 19: Employee contributions into the scheme will be a minimum 4% of Upper Band Earnings. Employer contributions, to be phased in over a three-year period from 2012 will ultimately be 3% of Upper Band Earnings. These sentences have been replaced with: Contributions required to the scheme are a total of 8% of Upper Band Earnings, with the employer paying at least 3% and the employee making up the difference.



The following sentence has been added before the three ActEd text bullet points at the top of page 19: The eligibility and contribution requirements will be phased in, in stages, over a period which is expected to be three years. Pages 36, Section 5.3 The paragraph of Core Reading at the top of the page has been deleted and replaced with: It should be noted that Guidance Notes 3, 4, 11, 13 and 24 no longer formally apply in the UK but many actuaries still consider the principles set out in them when formulating advice. The subject matter of Guidance Notes 9, 11, 16, 19, 26, 28, 29 and 36 are referred to within other parts of the Core Reading and may be directly examinable. The following paragraph has been updated slightly to read: Members of the profession should also be aware of the general guidance given in the “Professional Conduct Standards” (PCS). A new “Actuaries’ Code” to replace the PCS is under review at the time of going to press and is expected to be implemented in 2009. Chapter 3 Page 4, Section 2.1 The following paragraph has been added at the end of the ‘Monies set aside (contributions)’ section: In April 2009 the UK Government announced its intention to restrict tax relief on pensions savings for high earners with effect from 2011. Details are covered in section 5.2 below. Page 13, Section 5.2 The ’Annual Allowance’ section has been amended to read:



Annual Allowance (AA) Under the new tax regime, individuals can claim tax relief on personal contributions up to the higher of £3,600 and 100% of annual earnings. Restrictions will apply for certain high earners which are covered in more detail below. In addition, individuals can claim full tax relief in respect of any contributions paid on their behalf by a third party, provided the total personal contributions does not exceed the higher of £3,600 and 100% of annual earnings. There are no limits on the amount of employer contributions eligible for tax relief. In order to control the flow of contributions to, or accrual in a registered pension scheme, an upper limit, known as the Annual Allowance, on the amount of contributions and benefits that may be built up in any one tax year that are eligible for tax relief. The AA, which will be reviewed every five years, is £245,000 for the 2009/10 tax year and for 2010/2011 tax year will be £255,000. It is not clear how the AA will increase after 2010/11. In April 2009 the UK Government announced its intention to restrict tax relief on pensions savings with effect from 6 April 2011 for high earners. Under the proposals, tax relief will be reduced from the current marginal tax rate of 40% for individuals earning more than £150,000 a year, tapered down to the basic tax rate of 20% for individuals with taxable income of £180,000 or more. Legislation known as “anti-forestalling” has been introduced to apply from 22 April 2009. Under the anti-forestalling legislation, individuals meeting certain circumstances will be subject to a special annual allowance of £20,000 above which no tax relief in excess of the basic rate of income tax (20%) will be available. Broadly, the circumstances under which this special annual allowance will apply are:

• The annual taxable earnings in any of the last three tax years exceed £150,000; and

• The individual increases their pension savings on or after 22 April 2009; and

• The individual’s pension savings exceed £20,000 in the tax year. Page 14, Section 5.2 The following paragraphs have been added just before the ‘Lifetime Allowance’ section: The special annual allowance will run alongside the AA and will apply to total annual contributions, whether they are made by the individual, their employer or a third party.



It is possible that an individual could be liable to tax under both the AA and the special annual allowance. Where this occurs the amount chargeable due to the special annual allowance charge will be reduced by the excess over the existing annual allowance. Page 14, Section 5.2 The sections on the LTA have been amended to read: Lifetime Allowance (LTA) From 6 April 2006 schemes are no longer required to restrict the level of benefits paid to members. Instead, there is a Lifetime Allowance (LTA) against which the total value of a member’s aggregate benefits from registered schemes is assessed. Registered schemes include personal pension plans, stakeholder plans, occupational pension schemes, retirement annuity contracts and deferred annuity contracts. The LTA, which will be reviewed every five years, is £1,750,000 for the 2009/10 tax year and for 2010/11 tax year will be £1,800,000. It is not clear how the LTA will increase after the 2010/11 tax year. Page 22, Section 5.3 The last sentence of this section has been updated to. The notional earnings cap for the 2009/10 tax year is £123,600. Chapter 4 Page 20, Section 3.2 The following has been added at the end of Section 3.2, replacing the final paragraph.

11 Dispute Resolution – reasonable periods

July 2008 Trustees or managers of occupational pension schemes and trust based stakeholder schemes and to the ‘specified person’ making a decision in a two-stage dispute resolution procedure. It will also be of interest to pensions practitioners in general.



An twelfth Code of Practice entitled “Circumstances in relation to the material detriment test” is currently laid before parliament. It sets out the circumstances in which the Regulator expects to issue a contribution notice as a result of being of the opinion that the material detriment test is met. A contribution notice is an obligation to pay funds into a pension scheme and the material detriment test is based on whether a scheme sponsor’s actions or failures have had a materially detrimental effect on the likelihood of members receiving their benefits. Page 32, Section 7.1 The wording on the PPF compensation cap has been updated as follows: The cap for the year 2009/2010 is currently set at approximately £31,900 for an NPA of 65 and will increase in line with earnings. Page 35, Section 7.3 The first two paragraphs on this page have been updated as follows: At the start of each financial year, the PPF Board estimates the total levies required to fund the PPF. For the 2008/09 financial year, the estimates for the scheme-based and risk-based levies were £135 million and £540 million respectively, giving a total of £675 million, ie the same as for 2007/08. The intention was that this figure will remain stable for the next three financial years, subject to earnings indexation and assuming there are no significant changes to the level of risk. The levy estimate for 2009/10 has therefore been announced at £140 million for scheme-based and £560 million for risk-based, giving a total of £700 million. The scheme based levy imposed on a scheme is determined by the value of the scheme’s protected liabilities, multiplied by a multiplier which is set annually. At the time of going to press, the PPF had provided an indicative multiplier of 0.000162 for the 2009/10 tax year. This figure has yet to be formally confirmed but it is anticipated that the final figure will not differ from this.



Page 37, Section 7.3 The sentence of core reading between questions 4.10 and 4.11 has been deleted and replaced with the following: c is the levy scaling factor which has been set at 2.22 for the 2009/10 financial year. In previous years an indicative figure for the scaling factor was published in advance of the final figure to aid financial planning. However, the difference between the two was significant for the 2008/09 financial year. The indicative figure of 1.6 for that year, based on information as at November 2007, was revised up to 3.77, based on data provided up to 31 March 2008. To reduce volatility and aid financial planning the risk measurement dates have therefore been brought forward by 12 months to enable the scaling factor to be published in advance of the levy year, removing the need to publish an indicative figure. A number of assumptions have, as a result, had to be incorporated into the determination of the scaling factor. The following paragraph has been added to the end of this section: The levy for 2010/11 is expected to be calculated in a similar basis to the levy for 2009/10 financial year. However the PPF has proposed the implementation of certain changes to the levy formula from the 2011/12 financial year. These changes will be intended to develop the levy formula to include a specific allowance for long-term risk factors such as longer term employer insolvency risk and investment strategy risk. A consultation will take place to include the draft determination and the scaling factor. Chapter 6 Page 42, Section 7.3 The GMP fixed rate revaluation rate for current leavers has been amended from 4.5% per annum to 4% per annum. Chapter 8 Page 10, Section 4.1 The last sentence of Core Reading on this page has been amended to: Though they can rely on specialist advice, ultimately it is their decision.



Page 11, Section 4.2 The second bullet point in the list on this page has been amended to: • taking into account any risk-based measure, for example the sponsor’s

credit rating if this is available

Page 15, Section 5.2 The sentence of Core Reading after Q8.11 has been amended to: As discussed in Section 4.1 above this is ultimately a matter for the trustees. Actuaries can, however, add value by incorporating sponsor covenant information into their advice Chapter 20 The earlier parts of this chapter to the end of Section 2 have changed considerably – revised pages 4-15 are attached. Appendix A new version of GN19 has been issued and is attached.



2 Changes to the ActEd Course Notes

Chapter 1 Page 11, Section 3.2 The following wording has been added after the Core reading regarding Guidance notes 24 and 48. “GN3, GN4 and GN13 were disapplied on 30 November 2008. GN24 was disapplied on 16 January 2009. GN51 was readopted by the Actuarial Profession with effect from 1 December 2008.” Page 15, Section 4.1 The dates in the first paragraph have been rolled forward one year. Page 21, Section 4.2 This paragraph has been updated to read: “This is intended to be a useful summary so that you get a feel for the order of magnitude of each item. Basic State Pension

single person £95.25 a week married couple £152.30 a week

Lower Earnings Limit £95.00 a week

(£4,940 a year) Upper Earnings Limit £844.00 a week

(£43,888 a year) Qualifying Earnings Threshold £4,940 a year Low Earnings Threshold £13,900 a year Upper Accrual Point £40,040 a year”



Chapter 2 Page 8, Section 1.1 The following sentence has been added after the first sentence of Core Reading in the third bullet point relating to S2P accrual: “In fact, from April 2009, the actual upper limit for Band 3 accrual is the Upper Accrual Point (UAP) and not the UEL.” The following sentence has been added after the Core Reading detailing the 2009/2010 UEL: “The UAP for 2009/2010 is £40,040.” Page 9, Section 1.1 The paragraphs at the top of the page have been updated to: “The UEL was increased considerably in 2009 to bring it into line with the income tax basic rate limit. Previously the UEL increased in line with the BSP. As noted above, from April 2009 the UEL has been replaced as the upper limit for earnings-related accrual under S2P by the Upper Accrual Point (UAP). At the time of writing (May 2009):

• the UAP is be £770 per week (the level of the UEL for 2008/09).

• it is expected that the level of the UAP will be fixed in perpetuity and the UEL will continue to increase over time. However, as both S2P accrual and contracting out rebates will now be calculated with reference to the UAP, the UEL will have no further relevance for S2P and contracting out.”

Page 44, Solution 2.4 The solution has been updated as follows: Solution 2.4

Suppose that the person has a working lifetime of N years.



Accrual of S2P

40% 13,900 4 940 10% 3 13,900 2 4 940 13,900( , ) (( , ) )

20% (40,040 (3 13,900 2 4,940))

7,020

N

N

×⎛ ⎞× − + × × − −= ÷⎜ ⎟⎜ ⎟+ × − × − ×⎝ ⎠

=

Accrual of SERPs

20% (43,888 4,940)

7,790

N

N

= × ÷−

=

You will note that the accrual under SERPs is more generous as the upper accrual point now impacts on the accrual of S2P for this individual. Page 9, Section 1.1 The last two paragraphs on this page have been updated to: “The guarantee credit aims to ensure that pensioners have a minimum level of income. This minimum is £130.00 per week for a single pensioner in the 2009/10 tax year. The savings credit rewards pensioners for having some savings that raises their total income above a threshold level. In 2009/10, the minimum savings credit threshold for a single pensioner is £96.00 per week.” Question and Solution 2.5 Question 2.5 (on page 10) and solution 2.5 have been amended as follows:

Question 2.5

Calculate the pension credit and hence total income of a single person whose only income, apart from the pension credit, is: (a) £95.25 per week (ie they receive only the Basic State Pension). (b) £110 per week, (including the Basic State Pension) (c) £140 per week (including the Basic State Pension)



Solution 2.5

(a) Someone whose weekly income is £95.00 will get the guarantee credit of £35.00 per week. So their total income is £130.00 per week (including the BSP)

(b) Someone whose income from all sources (apart from Pension Credit) is £110 per

week will get: – guarantee Credit of £20.00 per week, plus – savings credit of £8.40 per week ( 60% (110 96)× −

So their total income is £138.40 per week.

(c) Someone whose income from all sources (apart from Pension Credit) is £140 per week will get: – no guarantee credit (since their income exceeds the minimum income

guarantee) – savings credit of £24.40

(60% (130 96) 40% (140 130))× − − × − per week

So their total income is £164.40 per week. Page 33, Section 5.1 The following wording has been added after the fifth and sixth bullet points on this page respectively: • (note that new regulations came into force with effect from 1 October 2008

which give the trustees the responsibility for setting the method and assumptions)

• (note that new regulations came into force with effect from 1 October 2008 and this issue now only needs to be considered by the trustees)

Page 36, Section 5.3 The following wording has been added after first paragraph of Core Reading on this page: “Note that GN11 ceased to apply from 1 October 2008.”



Chapter 3 Page 6, Section 2.2 The last sentence of ActEd text on this page has been amended to read: “From April 2009 the upper limit on earnings subject to contracting-out reductions has changed from the UEL to the UAP.” Page 14, Section 5.2 Question 3.1 has been amended to:

Question 3.1

Does the capital value of the increase in Mary’s pension rights exceed the Annual Allowance for 2009/10? • At 5 April 2009 Mary has 10 years’ pensionable service in a scheme of 60th

accrual rate.

• Her pensionable salary as at 5 April 2009 is £60,000.

• Her pensionable salary as at 5 April 2010 is £72,000.

Page 16, Section 5.2 The first part of Question 3.3 has been amended to:

David will retire in January 2010. He will receive:

• a Basic State Pension of £4,953 pa

Page 19, Section 5.2 The first paragraph of ActEd text in the section ‘Benefits payable on death’ has been amended to read: “So, if a member dies in service during the 2009/10 tax year a dependant could receive a lump sum of up to £1.75m without incurring a lifetime allowance charge. However, any lump sum will reduce the dependant’s unused LTA.”



Page 31 Solution 3.1 has been amended to: Solution 3.1

Mary’s annual pension entitlement at 5 April 2009:

= 10 x 1/60 x £60,000

= £10,000 Mary’s annual pension entitlement at 5 April 2010:

= 11 x 1/60 x £72,000

= £13,200 The increase in Mary’s annual pension rights:

= £13,200 - £10,000

= £3,200 The increase in the value Mary’s pension rights:

= £3,200 x 10

= £32,000 This is within the Annual Allowance of £245,000. Page 32 The final sentence of Solution 3.3 has been amended to read: “This is within the Lifetime Allowance of £1,750,000.”



Chapter 4 Page 6, Section 1.1 The following sentence has been added after the existing ActEd text sentence regarding GN51. “GN51 was withdrawn by the Board of Actuarial Standards on 30 November 2008 and readopted by the Actuarial Profession with effect from 1 December 2008. Page 21, Section 3.3 The following paragraph has been deleted just before the ‘Clearance’ section. “At the time of writing (May 2008), the Government is planning to increase TPR’s powers to issue FSDs and contribution notices. A consultation on the proposed changes is underway.” The following paragraph has been added to the end of the ‘Clearance’ section. “Examples of the ways TPR have used their powers are given below. More details can be found from the press reports confirming these actions which can be found under the “Media centre” section of TPR’s website:

• the suspension of an independent trustee from a number of pension scheme in August 2008

• appointed three independent trustees to a pension scheme in October 2007

• issued two financial support directions against a parent company in respect of two pension schemes belonging to its UK subsidiary in June 2007

• prohibited an individual from acting as a trustee of any trust-based pension scheme in January 2007.”

Page 25, Section 5 The last paragraph on this page has been updated as follows: “The new regime was phased in gradually - pension schemes became subject to the new regime at their first formal valuation on or after 22 September 2005. The MFR continued to apply until then.”



Page 29, Section 5.5 The second paragraph on this page has been amended to read: “The security of members’ benefits is influenced by the prudence of the assumptions used to calculate the liabilities and the method and time period over which any deficit is removed. TPR will use a “filter” in order to identify those schemes to investigate further. This investigation could lead to more prudent funding being required or may lead TPR to conclude that this funding is sensible given the circumstances of the scheme and sponsor. The filter has two components, one based on technical provisions, the other on the recovery plan.” Page 32, Section 7.1 The ActEd text in this section has been updated to: “A member who retires earlier than age 65 will be subject to a lower compensation cap. For example, the cap for 2009/2010 for a member retiring at age 55 is around £26,800.” Page 35, Section 7.3 The first sentence of ActEd text in this section has been updated to: “The PPF has subsequently confirmed that the multiplier to be used in the scheme based levy calculation for 2009/10 is 0.000162 (ie 0.0162%).” Pages 37 and 45, Question and Solution 4.11 Question and Solution 4.11 have been amended as follows:

Question 4.11

Calculate the expected 2009/10 PPF levy for a scheme that has assets of £180m, whose protected liabilities are 90% funded on the S179 basis and whose only participating employer has an assumed probability of insolvency of 0.30%.

Solution 4.11

The scheme has protected liabilities of:

180 £20090%

m m=



The scheme-based levy is:

£200 0.0162% £32,400m× = The underfunding risk, U is:

1.21 £200 £180 £62m m m× − = Therefore, the risk-based levy is:

£62 0.30% 80% 2.22 £330,336m× × × = So the expected PPF levy for 2009/10 is:

£32,400 £330,336 £362,736+ = Page 37, Section 7.3 The following two paragraphs have been inserted at the end of this section: “The PPF has proposed that, although an element of the levy should continue to reflect short-term risk, this should be at a lower overall level than currently. To take account of long term risk, a second component will be added to the risk-based levy, using the same data inputs (ie scheme assets, liabilities and insolvency probabilities) but directly reflecting the impact of long-term risk. This should mean that the short-term risk will no longer need to be scaled up to cover unexpected risk using the scaling factor. The scheme-based component will be retained, though not necessarily at the existing proportion of the total levy. The scheme-based levy is currently a flat-rate payment that partially compensates for the inability of the current levy formula to allow for long-term risk. At the timing of writing (May 2009) consultation on the proposal is under way and the PPF Board has stated it will publish a summary of responses and a statement of the final policy on the website during late spring 2009.”



Page 38, Section 8 This section has been amended to read: “The Pensions Act 2004 made provisions for the Financial Assistance Scheme (FAS). The FAS compensates some people who have had benefits reduced as a result of underfunding when their scheme started to wind up between 1 January 1997 and 5 April 2005 (after which the PPF applies) and either their employer

• is insolvent

• no longer exists, or

• no longer has to meet its commitment to pay its debt to the pension scheme. The scheme came into operation on 1 September 2005 and the benefits have been improved on a number of occasions since then. The FAS will now top up members’ benefits so that, overall, they receive 90% of their expected pension, subject to a maximum overall pension of £26,000 pa, payable from scheme normal retirement age (but not before age 60). The FAS is administered by the Department for Work and Pensions and is managed by the FAS Operational Unit (FAS OU). The Financial Assistance Scheme (Amendment) Regulations 2008 became effective from 23 December 2008. They provide an exception to the qualifying condition that schemes must have commenced winding up by 5 April 2005. This enables certain occupational pension schemes which could not qualify for the FAS or the Pension Protection Fund to be qualifying pension schemes for the FAS.” Page 38, Section 8 The following question (and solution) has been added:

Question 4.13

Can you think of an example of a scheme that will now be eligible for the FAS?

Solution 4.13

A scheme where the employer became insolvent before 6th April 2005 (and therefore cannot begin a PPF assessment period) but did not start to wind up until after 5th April 2005 (and so could not be a qualifying pension scheme for the purposes of the FAS).



Chapter 5 Page 12, Section 3.3 The section ‘Inflation protection up to retirement’ now reads: “Final salary benefits maintain their purchasing power whilst they are accruing because of the link to salary. Thus, if a member retires as an active member, the pension will be based on final salary at retirement. However, if the member leaves the scheme before retirement, the leaving service entitlement, based on service and final salary at exit, might only be increased at the statutory minimum level (price inflation up to a maximum of 5% for each complete year measured over the whole period). The Pension Act 2008 changed the statutory minimum revaluation rate to price inflation up to a maximum of 2.5% for each complete year measured over the whole period. This is effective in respect of benefits accrued after 6 April 2009. The change is not mandatory and therefore does not override scheme rules. Thus, a rule amendment may be required to reduce the rate or to maintain the current rate. Therefore, an individual’s benefit entitlement is exposed to erosion by inflation in periods where inflation exceeds the maximum limit on increases before retirement (eg 5% pa over the whole period for leavers after 1990 and before April 2009). In addition, for members who left before 1991, the statutory minimum increase applied only to part of the benefit. Hence there is even less inflation protection.” Chapter 6 Page 19, Section 3.2 Added an additional sentence of ActEd text after the first paragraph of Core Reading in the S2P section in number 3 so that the ActEd text now reads: “Looking at earnings between the LEL and UEP may now be appropriate. This gives the target S2P accrual of 20% after a 40 year career.” Page 42, Section 7.3 The following paragraph of text has been added before Question 6.18:



“The Pension Act 2008 changed the statutory minimum revaluation rate to price inflation up to a maximum of 2.5% for each complete year measured over the whole period. This is effective in respect of benefits accrued after 6 April 2009. The change is not mandatory and therefore does not override scheme rules. Thus, a rule amendment may be required to reduce the rate or to maintain the current rate.” Page 42, Question 6.18 Question and Solution 6.18 have been amended to:

Question 6.18

Calculate the withdrawal benefits (ie the accrued pension and the pension payable from NRA) in the following circumstances. You should also assume that GMPs are revalued at a fixed rate. Use an assumption for RPI of 3% pa. (i) Final pensionable earnings = £15,000 Service = 10 years Date of leaving = 10/4/02 Accrual rate = 1/60 GMP = £320 pa Term to normal pension age = 20 years Term to state pension age = 19 (tax) years (ii) Final pensionable earnings = £30,000 Service = 1 year Date of leaving = 31/10/08 Accrual rate = 1/60 GMP = £0 pa Term to normal pension age = 30 years Term to state pension age = 30 (tax) years (iii) Final pensionable earnings = £40,000 Service = 4 years Date of leaving = 06/10/09 Accrual rate = 1/60 GMP = £0 pa Term to normal pension age = 25 years Term to state pension age = 25 (tax) years



Solution 6.18

(i) 10 15,000 2,50060

× = at date of leaving, of which 320 is GMP

320 × 1.04519 + (2,500-320) × 1.0320 = 4,675.84 at NPA, of which 738.52 is

GMP (ignoring rounding to weekly amounts) (ii) Scheme rules are likely to stipulate that the only benefit available in this case is a

refund of member contributions. However, if a deferred pension were provided it would be calculated as follows:

160

30 000 500× =, at date of leaving,

500 × 1.0330 = 1,213.63 at retirement age.

(iii) 4 40,000 2,666.6760

× = at date of leaving, of which 6 months is accrued post

April 2009 ie 333.33.

(2666.67-333.33) × 1.0325 + 333.33 × 1.02525 = 5,503.47 at NPA. Page 43, Section 7.3 The final sentence of ActEd text on this page has been replaced with: “GN11 was disapplied with effect from 1 October 2008 when The Occupational Pension schemes (Transfer Values) (Amendment) Regulations 2008 came into force. The Board for Actuarial Standards has issued no new guidance in this area. Calculation of transfer values is covered in detail in Chapter 20, Options and guarantees.” Page 67, Summary The following paragraph has been added to the bottom of the summary box: “The Pension Act 2008 changed the statutory minimum revaluation rate to price inflation up to a maximum of 2.5% for each complete year measured over the whole period, effective in respect of benefits accrued after 6 April 2009.”



Pages 71/72, Solution 6.9 The solution has been updated to: Solution 6.9 (i) The scheme is non-contributory with no restrictive membership conditions.

Therefore we could perhaps assume that all employees are members, although this won’t quite be true in practice as there are always a few employees who choose not to join such a “no-lose” scheme.

An estimate of pensionable payroll currently is thus:

12,000,000 – 600 × 4,940 = 9,036,000

(Say £9m as it’s very likely that the £12m is a rounded figure.) (ii) Assuming that the company retains approximately the same number of staff an

estimate for next year’s pensionable payroll is: 12m × 1.04 – 2.964m × 1.025 = 9.44m, ie an increase of 4.9%

This demonstrates how pension costs can increase more quickly than salary costs where the scheme has an offset which tends to increase less quickly than wages.

Chapter 7 Page 5, Section 2.2 The third paragraph on this page has been amended to read: “Guidance Notes GN9 and GN49 currently relate to the SFO. However, the Board for Actuarial Standards (BAS) published an exposure draft in March 2009 of a standard for reporting which is expected to come into force in April 2010 and apply in this area. The syllabus requirements relating to this are covered in Chapter 16, The need for valuations. The Pensions Regulator is responsible for overseeing compliance with the legislation, and has issued Codes of Practice and other guidance.”



Page 19, Section 5.4 The first paragraph of ActEd text in this section has been amended to read: “Employee and employer NI contributions are based on earnings over a limit (£5,720 pa for the tax year 2009/10). The same rate of employer NI contributions (12.8% for the tax year 2009/10) are paid on all earnings above this limit. Employee NI contributions at the rate of 11% (for the tax year 2009/10) are paid on earnings between this limit and the UEL (£43,888 for the tax year 2009/10) with only 1% contributions paid on the earnings above the UEL.” Chapter 8 Page 19, Summary The second bullet point under the heading ‘Monitoring the sponsor’ has been amended to:

• monitor any risk-based measures eg sponsor’s credit rating

Chapter 9 Page 48, Section 4.3 The following paragraph has been added at the end of this section: “Consultation on these recommendations closed in June 2008 and in October 2008, the Government published its response. The key themes which came out of the consultation process are:

• There will be a smaller number of simplified, higher-level principles.

• These principles will be linked to a body of higher quality, more selective and accessible guidance and trustee tools.

• There will be greater industry ownership of the principles, guidance and trustee tools through the establishment of a joint Government-industry Investment Governance Group.

• There will be a more robust approach to disclosure and industry debate, within a voluntary 'comply or explain' approach.



The Investment Governance Group is an industry led body with its membership comprised of experienced figures directly involved in the governance of investment decision-making. This group has a mandate to tackle the issues identified in the NAPF’s proposals and endorsed by the consultation.” Chapter 13 Page 2, Section 0 The following paragraphs have been added at the end of this section: “As part of its project to develop new actuarial standards, in May 2009 the Board for Actuarial Standards (BAS) published an exposure draft of a standard on modelling. The proposed standard is expected to come into force by April 2010, with earlier adoption strongly encouraged. It is a principles-based generic standard which will apply across many areas of actuarial work. The consultation periods for the exposure draft ends on 28 August 2009. A copy can be downloaded from the BAS’s website at http://www.frc.org.uk/bas/publications.” Page 16, Section 2.2 The following text has been inserted between the second and third sentences of Core Reading in the ‘Price inflation’ section: “The Pension Act 2008 changed the statutory minimum revaluation rate to price inflation up to a maximum of 2.5% for each complete year measured over the whole period. This is effective in respect of benefits accrued after 6 April 2009. The change is not mandatory and therefore does not override scheme rules. Thus, a rule amendment may be required to reduce the rate or to maintain the current rate.” Page 16, Question 13.6 The words “and before 6 April 2009” have been added after the words “31 December 1990”. Page 28, Question 13.15 The words “for benefits earned pre 6 April 2009” have been added at the end of part (ii) of the question.



Page 31, Section 4.1 The following paragraph has been inserted before the sentence of Core Reading: As for the economic data, homogeneity and data accuracy are important. “In June 2009, the Actuarial Profession published, for consultation, a prototype model to project future mortality rates. The model has been developed in response to the continuation of significant increases in life expectancy since projections were last published by the Profession in 2002. The working party also plans to publish the initial results of its research into recent experience of life expectancy in the future. The consultation period for the model and research ends on 31st August 2009. The model and related papers are available at http://www.actuaries.org.uk/knowledge/cmi” Page 34, Section 4.4 The paragraph of ActEd text after the first paragraph of Core Reading in the “Regulations and professional guidance” section has been amended to read: “TPR have published guidance for the trustees when choosing the mortality assumption. This guidance is detailed and includes consideration of:

• how the proposed mortality assumptions are justified by the evidence available; and

• an appropriate margin for prudence.” Page 37, Section 4.4 The first paragraph of ActEd text on this page has been amended to: “Recent Working Papers can be found on the Profession’s website under http://www.actuaries.org.uk/knowledge/cmi/cmi_wp. The latest paper, at the time of writing (May 2009) is Working Paper 37, however, Working Papers 22 and 26 are the latest papers that are directly relevant to the “00” series tables.” Page 58, Section 6.4 The first two paragraphs on this page have been amended to: “Practitioners commonly use the approximation that a decrease in i - pinc of ½% pa leads to an increase in liabilities of 7%. You can check the accuracy of this approximation in different circumstances by looking up annuity values in a suitable mortality table, such as PMA/PFA92.



Thus, awarding pension increases at 3% pa could add about 40% to the liabilities of a scheme compared with the liability if no increases are given. The increase in liability depends considerably on:

• the mix of males and females,

• the normal retirement age, and

• the valuation interest rate and other assumptions.” Chapter 14 Pages 6-10, Sections 2.2, 2.4 and 3 Various sections have been altered and Section 3 has been deleted. Replacement pages 6-10 are included in this upgrade. Subsequent sections should be renumbered accordingly. Pages 16, Section 5.1 (now Section 4.1) The following text has been added at the bottom of this page: As noted earlier, for wind-ups commencing on or after 6 April 2005 the priority order is:

1. expenses of terminating the scheme and debts of the scheme

2. liabilities secured under a pre-1997 contract of insurance

3. liabilities arising from benefits which would be provided if the scheme entered the Pension Protection Fund (other than those covered above)

4. liabilities arising from defined benefit (eg added years) AVCs

5. liabilities arising from any other benefits. Assets are allocated to the various categories in accordance with this calculation. Any excess assets can be used to secure additional benefits for members in accordance with the priorities set out in the Trust Deed and Rules of the individual scheme. Any shortfall in the assets is dealt with by abating members’ benefits in reverse order of priorities. Page 27, Summary The sentence relating to GN19 has been deleted.



Chapter 15 Page 1, Section 0 The following text has been inserted after the first paragraph of this section: “As part of its project to develop new actuarial standards, in May 2009 the Board for Actuarial Standards (BAS) published an exposure draft of a standard on data. The proposed standard is expected to come into force by April 2010, with earlier adoption strongly encouraged. It is a principles-based generic standard which will apply across many areas of actuarial work. The consultation periods for the exposure draft ends on 28 August 2009. A copy can be downloaded from the BAS’s website at http://www.frc.org.uk/bas/publications.” Chapter 16 Page 7, Section 1.4 This section has been deleted. Page 15, Section 2.3 This section has been deleted. Page 16, Section 2.5 The second sentence of this section has been amended to: “The calculation of individual transfer values, or cash equivalents, is covered in Chapter 20. Note that it is unlikely to equal the funding valuation reserve for that individual.“ Page 17, Section 2.8 The following has been added after GN13 in the last paragraph of Core Reading in this section: “(GN13 was disapplied on 30 November 2008)”



Page 22, Section 3.3 This section has been amended to: “The debt on the employer calculation takes the value of the liabilities on a solvency basis and the assets at market value.” Question 16.10 has been deleted. Page 23, Section 3.4 This section has been amended to: “These are discussed in Chapter 20, Options and guarantees. The responsibility for setting the transfer value basis lies with the trustees although they should seek actuarial advice.” Page 24, Section 4.1 This following text has been added at the start of this section: “As part of its project to develop new actuarial standards, the Board for Actuarial Standards (BAS) published in March 2009 an exposure draft of a standard for reporting. The proposed standard for reporting is expected to come into force in April 2010. It will be principles-based, and will be one of the BAS’s generic standards, applying across many areas of actuarial work. The consultation period for the exposure draft ended on 29 May 2009. Copies can be downloaded from the BAS’s website at: www.frc.org.uk/bas/publications/pub1883.html.” Page 27, Summary The third bullet point on this page has been deleted. The reference to GN11 after the fifth bullet point on this page has been removed. The reference to GN13 after the eighth bullet point on this page has been removed.



Page 28, Summary The wording of the Debt on the employer section has been amended as follows:

Debt on the employer The solvency basis should be used to calculate the debt on the employer.

The wording of the Individual transfers section has been amended as follows:

Individual transfers The responsibility for setting the transfer basis lies with the trustees who should seek actuarial advice.

Chapter 18 Page 12, Section 2.9 The last sentence of this section has been amended as follows: “TPR has issued guidance on when companies may wish to seek clearance and the procedure to follow. This guidance, which was revised in December 2008, is entitled “Clearance guidance” and can be downloaded from TPR’s website at: http://www.thepensionsregulator.gov.uk/pdf/ClearanceGuidanceRevisedDec08.pdf.” Page 23, Section 4.4 The last two paragraphs of this section has been amended as follows: “When a solvent employer ceases to participate in a multi-employer scheme it becomes liable to pay its share of the statutory debt, calculated on a buy-out basis. (The share of the debt apportioned to the other employers does not have to be paid.) This may be a significant issue for the employer ceasing to participate. Alternatively, an employer who is ceasing to participate may enter into an approved withdrawal arrangement or the remaining employers can agree to share the exiting employer’s debt. In both cases various conditions need to be met and these were outlined in Chapter 14. The debt on employer calculation is described in more detail in Chapter 14.”



Chapter 19 Page 5, Section 1.3 The last sentence of ActEd text in this section been deleted. Page 17, Section 3.9 The last sentence of ActEd text in this section has been deleted and replaced with: “GN13 was disapplied on 30 November 2008.” Page 54, Summary The reference to GN13 in the FAS87 section has been deleted. Chapter 20 Page 4 to 15 The earlier parts of this chapter, including Section 2, have changed considerably – revised pages 4-15 are attached.



Page 33, Summary The ‘Transfer values’ section of the summary has been updated to:

Transfer values The Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008 became effective on the 1 October 2008 and cover the calculation of transfer values. These regulations introduce an “initial cash equivalent” (ICE) which is the minimum cash equivalent before any reduction for underfunding is applied. An alternative transfer value can be paid provided it is higher than this minimum amount. In summary:

• the ICE is calculated by taking account of the expected cost to the scheme of providing the member’s accrued benefits

• the trustees are responsible for determining the assumptions to be used, having taken the advice of the Scheme Actuary

• the assumptions as a whole must lead to the “best estimate” of the cash equivalent

• the trustees should determine any allowance for discretionary benefits

• the trustees should determine any allowance for any favourable options

• the trustees must have regard to the investment strategy of the scheme when setting the discount rate.

GN11 was withdrawn with effect from 1 October 2008.

Chapter 22 Page 9, Section 4.1 The following paragraph of ActEd text has been added after the four bullet points on this page: “It may also be possible to mitigate some of the risks in other ways. For example, there is discussion concerning new approaches to hedging longevity risk through the capital markets.”



Chapter 23 Page 13, Summary The last sentence of the “Application of surplus or deficit” section has been deleted. Chapter 26 Page 18, Section 1.2 The first bullet point on this page has been changed to:

• Leaving service – cash equivalent transfer value basis may be appropriate.



3 Changes to the Q&A Bank

Part 1 Solution 1.2 Any references to GN11 have been deleted. The reference to GN19 has been changed to refer to “Debt on Employer regulation”. The reference to GN3 has been deleted. The mark allocation for “general and ongoing monitoring” has been changed from a total of [3] marks to a maximum of [3] marks. Solution 1.3 The second paragraph of the solution has been changed to: “Tax relief is granted on contributions, up to the higher of £3,600 pa and 100% of annual earnings. However, additional restrictions will apply from 2011 for certain high earners. [1]” LTA and AA numbers updated to 2009/2010 tax year (£1.75m and £245,000 respectively) The mark allocation has been changed from a total of [6] marks to a maximum of [6] marks. Question and Solution 1.5 The initial date has been rolled forward one year to May 2010 and references to LTA and AA updated to 2009/2010 tax year figures The latter has resulted in an updated solution as follows: “The lifetime allowance for 2010/11 is £1.80m. The value of the pension already in payment is:

12,000 25 £300,000× =



So, there is scope to provide additional scheme pension of:

1.80 0.3 £75,00020

m m pa−⎛ ⎞ =⎜ ⎟⎝ ⎠

The employee’s final pay is £27,000 and he has 15 years of company service. To attain the maximum pension, the scheme accrual rate would need to be: 27,000 × 15/accrual rate = £75,000 pa accrual rate = 27,000 × 15/75,000 accrual rate = 5.4 [½] This accrual rate is very unlikely. The most common accrual rate of 60th would provide a pension of £6,750 pa, which is well within the lifetime allowance. [½] [Total 2]” Solution 1.7 (ii) References to the UEL have been changed to refer to the UEP and an approximation of UEP~8 x LEL is used. Question and Solution 1.10 (ii) Dates rolled forward one year and references to LTA and AA updated to 2009/2010 tax year figures. The second paragraph of the solution has been amended to: “Broadly speaking, you are now allowed to contribute as much as you wish each year, up to the greater of £3,600, your annual earnings and an annual allowance set at £245,000 for the 2009/10 tax year. However, additional restrictions will apply from 2011 for certain high earners, although based on your current remuneration, you are unlikely to fall into this category. [1]” Solution 1.12 References to LTA updated to 2009/2010 tax year figures and the third paragraph has been updated to: “The LTA will increase to £1.80 million for the 2010/2011 tax year. [½]”



Part 2 Solution 2.2 The following bullet point has been added at the start of this solution: • Meet the requirements of legislation and scheme documentation, including the

Trust Deed and Rules and the Statement of Investment Principles. Also consider other restrictions, such as [½]

– Myners’ principles [¼]

– requirements of Trust Law [¼]

– Statement of Funding Principles [¼]

The mark allocation has been changed from a total of [5] marks to a maximum of [5] marks. Solution 2.6 Amended the first two paragraphs under the heading ‘Other’ to read: “Currently, if a scheme is contracted out, both employee and employer pay reduced NI contributions on earnings between the LEL and the Upper Accrual Point (UAP). [1] Benefits accrue on earnings between the LEL and the UAP. Both employee and employer pay NI contributions at the standard rates on earnings above the UAP. [2]” Solution 2.7 (ii)(a) This solution has been amended as follows: (ii)(a) National Insurance contributions Currently, if a scheme is contracted out both employee and employer pay reduced NI contributions on earnings between the QEF and the UAP. [1] (For the tax year 2009/2010, the QEF is £4,940 pa and the UAP is £40,040 pa.) The reduction (rebate) in NI contributions on band earnings is currently 1.6% for employees and 3.7% for employers. [1] The rebates are not age related under the Reference Scheme Test route. [½]



Employers and employees pay NI contributions at the standard rates on earnings above the UAP. [1] Part 3 Solution 3.6 part (ii) The first sentence has been amended to: “Full details on the manner in which the liabilities and assets are calculated are described in version 4.5 of GN19. [½]” Solution 3.11 part (iii) The first paragraph in the “Pension increases” section has been amended to: “Revaluation of benefits in deferment will be equal to or lower than the lower of 5% (2.5% for benefits accrued after April 2009) and the assumed rate of price inflation as it is capped by 5% pa (2.5% pa for benefits accrued after April 2009). The reduction will depend on the expected variability of future price inflation, and stochastic modelling will be needed to get a satisfactory feel for the appropriate assumptions. [1]” Question 3.12 2008 has been updated to 2009. The words “under GN19” have been removed from part (iv) of the question. References to GN19 have been changed to debt on employer under part (ii) and removed from part (iv). Under part (ii) the first four bullet points under Transfer value terms – consider have been updated to: • “Transfer value is best-estimate value of alternative deferred pension. [½]

• Trustees set the basis with actuarial advice. [½]

• Consider reducing the transfer values, subject to legislation. [½]

• What allowance for discretionary benefits and options is to be made? [½]”



Part 4 Solution 4.6 The reference to GN19 has been deleted. Question and solution 4.8 2008 has been updated to 2009 throughout. The GN11 bullet point has been removed. The first reference to GN19 has been removed and the second reference amended to “legislation”. Question and solution 4.12 2008 has been updated to 2009 throughout. The basis in the question has been amended to: Interest rate 6.5% pa Salary increases 4.8% pa RPI inflation 2.8% pa Statutory increases – in service 2.8% pa Statutory pension increases - in payment 2.5% pa Statutory increases - in deferment for current actives 2.5% pa Statutory increases - in deferment for current deferreds 2.8% pa The fifth and sixth paragraphs under “Option D” in the solution have been amended to: “A rule of thumb is that a 1% decrease in the net post retirement valuation rate of interest results in a 14% increase in liability. Therefore, on the valuation assumptions, providing full RPI increases on future accrual will increase the overall contribution rate required by around 4.2% (ie 0.42% of payroll for future service) [1] If the benefit is introduced retrospectively, the past service liabilities of active members and deferred pensioners may increase by around £14m ([250 80] 0.042)+ × . The past service liabilities for pensioners may increase by a slightly different ratio, because of the higher average age than retirement age, but in this scheme it is unlikely to be material. Therefore the overall increase may be around £16m ([250 80 50] 0.042)+ + × [1]”



The second paragraph under “Overall impact on the surplus” in the solution has been amended to: “However, if these improvements were made to the accrued benefits, the surplus on the ongoing valuation basis would, broadly speaking, be reduced by around £67m, from £95m to around £28m. [½]” The sixth and seventh paragraphs under “Overall impact on the surplus” in the solution have been amended to: “Therefore there is insufficient surplus on the ongoing basis to meet both the company’s and the trustees’ wishes. However, as the difference is small, more accurate calculations may be needed to confirm this. [½] However, as there will be no surplus remaining to act as a cushion against adverse experience. The trustees may therefore wish to consider granting only some improvements (particularly if they are retrospective) and looking at this again at the next valuation [½]” Solution 4.13 The requirement to draft and the associated drafting marks have been removed from this question. The third paragraph of the solution has been amended to: “Members’ contributions to registered pension schemes are tax effective, receiving tax relief at their highest marginal tax rate. Additional tax relief restrictions will apply on pensions savings with effect from 6 April 2011 for high earners. [1]” Part 5 Question and solution 5.10 2008 has been updated to 2009 throughout. Solution 5.13 The second paragraph in the “Comment” box has been deleted. Question and solution 5.16 1996 and 1997 have been updated to 2009 and 2010 respectively throughout.



Solution 5.17 (i) (a) A new bullet point has been added at the top of this solution as follows: • If Company A participates in Company B’s scheme it becomes liable for part of

the debt on the employer on ceasing participation. Company A’s proportion of the debt will reflect the length of the participation period and the liabilities of its employees. Company A can put in place withdrawal arrangements to limit this liability if the Trustees of Company B’s scheme agree. A shorter period will reduce the debt and risk. If there is no participation period the debt and risk are eliminated. [1]

Part 6 Solution 6.1 The last bullet point has been updated as follows: • old scheme transfer value might have been reduced if funding level was low and

sponsor covenant weak. [½] Question and solution 6.2 The mark allocation for this question has been reduced to 2 marks. The top and bottom bullet point in the solution are now worth [½] mark each instead of [1] mark each. Solution 6.11 part (ii) The reference to GN11 has been changed to legislation. Question and solution 6.12 2008 has been updated to 2009 throughout. Question and solution 6.13 2007 and 2008 have been updated to 2008 and 2009 respectively throughout. Question and solution 6.14 2005 has been updated to 2008 throughout. The first two paragraphs under “Pension increases” has been updated as follows:



“The Scheme currently provides LPI pension increases (with a 5% cap) on post April 1997 benefits. If we assume that they wish to provide the same level of pension increases on pre April 1997 benefits and that a 1% increase to pensions costs about 14%, the maximum cost can be calculated as an increase in the guaranteed pension increases from 0% to 5%. This would cost £7m × 5 × 0.14 = about £9m in respect of past service. [1] However, with inflation currently being below 5% and looking as though it may stay below for some time, this is an overestimate. Moving from 0% to LPI would probably cost less than £9m – more likely to be of the order of £5m. [1]” Part 7 Solution 7.1 The following has been added to the solution in part (ii): “The trustees should also consider the sponsor covenant of the two employers. [½]” The first paragraph in part (iii) of the solution has been amended to: “The assumptions used by most pension schemes for the purposes of funding often errs on the side of caution rather than being best estimate. This is the case if the funding valuation is in accordance with the Statutory Funding Objective (SFO) where the assumptions are required to be prudent. [1]” Question and solution 7.2 Dates have been rolled forward one year.



4 Changes to the X Assignments

Please remember that only the current 2010 version of the assignments will be accepted for marking by ActEd for the session leading to the 2010 exams. The main changes to the X Assignments are as follows: Assignment X1 Question X1.1 (i) The mark allocation has been changed from 4 marks to 6 marks. Solution X1.1 The wording in the section ‘Accrual rate’ for the second and third bullet points has been amended to: • Band 2 – earnings above the level of that tax year’s LET but below that tax

year’s middle earnings factor (MET – which approximates to (3 × LET – 2 × QEF)). The current accrual rate is 10%. [½]

• Band 3 – earnings above that tax year’s MET but below that tax year’s upper accrual point (UAP). The current accrual rate is 20%. [½]

The following two paragraphs have been inserted under the heading ‘Level of benefit’ “SERPS offered a slightly higher rate of accrual than S2P for those who earn more than the UEP as it was based on total earnings between the lower earnings limit (LEL) and the upper earnings limit (UEL). The UEL is higher than the UAP. [1] For those earning less than the UEP but where Band 3 applies, S2P and SERPS offer the same rate of accrual. [½]” Question X1.2 13% and 15% have been changed to 18% and 20% respectively throughout. In part (ii) 7% has been changed to 6%. Solution X1.2 13% and 15% have been changed to 18% and 20% respectively throughout. In part (ii) 7% has been changed to 6%.



In part (i) ‘[Maximum 2 points for FS points]’ has been added after the bullet point list in the final salary winners section. The ‘Defined contribution winners’ section has been renamed the ‘Money purchase winners’ section and ‘[Maximum 3 points for MP points]’ has been added after the bullet point list in this section. Question X1.3 (i) The mark allocation has been changed from 14 marks to 13 marks. Solution X1.3 (i) A maximum of 2 marks can now be awarded for the first bullet point in this solution. Similarly a maximum of 3 marks can be awarded for the second bullet point in this solution. Question X1.4 The dates have been rolled forward a year. The mark allocation for part (ii) has been changed from 18 marks to 17 marks. Assignment X2 Question and solution X2.1 Dates rolled forward by two years. Question and solution X2.2 Dates rolled forward by one year. Solution X2.3 Any ¼ marks have been removed and replaced with ½ marks Assignment X3 Solution X3.1 (i) Any ¼ marks have been removed and replaced with ½ marks. A maximum of 1 mark can now be awarded for the last bullet point under “defined benefits approach” in part (i).



Assignment X4 Solution 4.1(iv) Any ¼ marks have been removed and replaced with ½ marks. The Annual Allowance is given for the 2010/11 tax year only. Assignment X5 Question and solution 5.1 Dates rolled forward one year throughout. Assignment X6 Question and solution 6.1 2005 and 2008 have been updated to 2006 and 2009 respectively throughout the question and solution.



5 Other tuition services

In addition to this CMP Upgrade you might find the following services helpful with your study.

5.1 Study Material

We offer the following study material in Subject SA4:

• Series Y assignments

• Mock Exam 2009 and Mock Exam 2010

• ActEd Solutions with Exam Technique (ASET)and Mini-ASET

• Smart revise. For further details on ActEd’s study materials, please refer to the 2010 Student Brochure, which is available from the ActEd website at www.acted.co.uk.

5.2 Tutorials

We offer the following tutorials in Subject SA4:

• a set of Regular Tutorials (lasting three full days)

• a Block Tutorial (lasting three full days). For further details on ActEd’s tutorials, please refer to our latest Tuition Bulletin, which is available from the ActEd website at www.acted.co.uk.

5.3 Marking

You can have your attempts at any of our assignments or mock exams marked by ActEd. When marking your scripts, we aim to provide specific advice to improve your chances of success in the exam and to return your scripts as quickly as possible. For further details on ActEd’s marking services, please refer to the 2010 Student Brochure, which is available from the ActEd website at www.acted.co.uk.



6 Feedback on the study material

ActEd is always pleased to get feedback from students about any aspect of our study programmes. Please let us know if you have any specific comments (eg about certain sections of the notes or particular questions) or general suggestions about how we can improve the study material. We will incorporate as many of your suggestions as we can when we update the course material each year. If you have any comments on this course please send them by email to [email protected] or by fax to 01235 550085.


All study material produced by ActEd is copyright and issold for the exclusive use of the purchaser. The copyright

is owned by Institute and Faculty Education Limited, asubsidiary of the Faculty and Institute of Actuaries.

You may not hire out, lend, give out, sell, store or transmitelectronically or photocopy any part of the study material.

You must take care of your study material to ensure that itis not used or copied by anybody else.

Legal action will be taken if these terms are infringed. Inaddition, we may seek to take disciplinary action through

the profession or through your employer.

These conditions remain in force after you have finishedusing the course.

SA4-14: Discontinuance


Where wind-up commences after 11 June 2003, the liabilities are calculated to meet:

● the cost of purchasing deferred annuities for non-pensioners

● the cost of purchasing immediate annuities for current pensioners

● an estimate of the expenses that are expected to be incurred in winding up the scheme.

SA4-14: Discontinuance Page 7


2.2 Multi-employer schemes

The rules governing multi-employer schemes are complicated. However, broadly speaking, if the scheme has a number of participating employers, any debt may need to be apportioned between them. The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2008 became effective on 6 April 2008. These regulations introduced a number of changes in this area. Previously, when a solvent employer ceases to participate in a multi-employer scheme it became liable to pay its share of the statutory debt, calculated on a buy-out basis. However, this employer was permitted to enter into a legally binding arrangement (a withdrawal arrangement) to pay less than its full share of the statutory debt. Stringent criteria surrounded these arrangements which, in practice, many companies found difficult to meet. The share of the debt apportioned to the other employers does not have to be paid. These regulations make it easier for companies to enter into arrangements, but also limit the potential for abuse of the legislation by an organisation hoping to abandon its scheme. The regulations are detailed and should be applied on a case by case basis.

2.3 Voluntary additional funds

In the case of a solvent sponsoring employer, any debt must be paid and it is possible that additional funds may also be provided. (The full debt is more likely to be met for pre-June 2003 wind-ups since the debt on post-June 2003 wind-ups is likely to be substantial.) These extra funds may be so that member’s benefit expectations can be met or to meet the cost of securing the minimum benefits by a more expensive means than the payment of cash equivalents.

Question 14.1

Why might the employer wish to pay additional funds into the scheme above those required by the Deficiency Regulations?



2.4 GN19

GN19 gives guidance to actuaries on some of the calculations required when a scheme winds up or a debt on the employer is triggered. GN19 remains in place (currently version 4.9) but the majority of the contents was removed with effect from 1 December 2008 as the new regulations (The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2008) are sufficiently detailed such that BAS considered that it is no longer required. It was decided not to remove GN19 as it is referred to in earlier legislation and previous versions of GN19 apply in certain circumstances as described below. Version 4.9 is not applicable in respect of:

● wind-up calculations for schemes that started to wind up on or after 1 December 2008; or

● deficiency calculations for schemes where the deficiency is being calculated as at a date after 5th April 2008.

Actuaries performing the calculations bulleted above need to refer to primary legislation. Version 4.8 of GN19 (which is referenced in version 4.9) remains applicable to broadly any scheme that, on or after 6th April 2005, started to wind-up or has an employer which, between 6th April 2005 and 5th April 2008, became insolvent or ceased to participate in the scheme. Version 4.5 (which is in Appendix B of version 4.8) of GN19 remains applicable in respect of priorities on winding up for pension schemes that started to wind up before 6th April 2005 and in respect of deficiency calculations for schemes where the deficiency is being calculated as at a date before 6th April 2005. Various elements of the winding-up process were discussed in previous versions of GN19. The actual process depends on the specific circumstances of the scheme and sponsor and is discussed in detail in Section 5 of this chapter. However, the issues raised in previous versions of GN19 are discussed below. The crystallisation date This date, which is usually the effective date of the start of the winding-up process, is the date at which members are allocated to liability categories.

SA4-14: Discontinuance Page 9


The applicable time This is the date used for the calculation of the debt on the employer in accordance with the Deficiency Regulations. The key points to note on the calculation of the debt on the employer are:

● The trustees tell the actuary the effective date of the calculations and the actuary’s advice should be addressed to the trustees.

● The actuary certifies the amount (if any) of the debt on the employer (calculated as the value of liabilities and expenses minus the value of assets).

● Assets, liabilities and expenses should be valued in accordance with the methodology described above (in section 2.1 of the notes)

Note that the debt on the employer calculated by the actuary does not guarantee that the scheme’s assets will be sufficient to meet its wind-up liabilities. If this amount is received and the scheme then winds up in accordance with the rules, the trustees might find that there is still a deficit because the wind-up liabilities are not consistent with those calculated to determine the debt. If the sponsoring employer is insolvent it is quite likely that liquidation of the company will not create sufficient funds for the debt to be met. On the liquidation of a company in the UK, the debt owed to the pension scheme is not a preferential debt but ranks alongside any other unsecured creditors. As mentioned in Chapter 4, the Pension Protection Fund should provide a minimum level of benefits for the members of underfunded defined benefit schemes where the sponsoring employer is insolvent or at serious risk of becoming insolvent. The calculation date The calculation date is the date used for the purposes of the calculation of the assets to be applied to each statutory priority category in order to meet the benefits. This calculation requires a step-by-step valuation, using the MFR assumptions and/or estimated cost of buy out (depending on the solvency of the employer and the date of wind-up), of the liabilities falling within each of the priority categories. For wind-ups which commenced between 1997 (when the statutory priority order was introduced) and 10 May 2004 the priority order gives high priority to pensioners’ benefits and contracted-out benefits. Many commentators felt that the extent of the difference in priority between pensioners’ and non-pensioners’ benefits was not justified. Therefore, in May 2004 the priority order for subsequent wind-ups was amended to reduce this disparity.



For wind-ups which commenced between 10 May 2004 and 5 April 2005 the order is:


2. liabilities arising from payment of AVCs

3. liabilities for pensions in payment which are secured by insurance policies, but excluding increases to pensions

4. liabilities for pensions in payment and provision for contingent dependants’ pensions, but excluding increases to pensions

5. liabilities for benefits accrued to other members, but excluding increases to pensions

6. liabilities for increases to pensions in payment

7. liabilities for increases to other accrued benefits. In April 2005 the priority order was changed again to reflect the impact of the introduction of the PPF. Therefore, for wind-ups commencing on or after 6 April 2005 the order is:


2. liabilities secured under a pre-1997 contract of insurance

3. liabilities arising from benefits which would be provided if the scheme entered the Pension Protection Fund (other than those covered above)

4. liabilities arising from defined benefit (eg added years) AVCs

5. liabilities arising from any other benefits. Assets are allocated to the various categories in accordance with this calculation. Any excess assets can be used to secure additional benefits for members in accordance with the priorities set out in the Trust Deed and Rules of the individual scheme. Any shortfall in the assets is dealt with by abating members’ benefits in reverse order of priorities. Where the calculations for pensioners are carried out on the MFR basis (ie for an insolvent employer for which wind-up commenced before 15 February 2005), if the sum allocated is greater than or less than the amount required to buy out their liabilities, the Winding Up Regulations state that the annuity purchase price should be substituted. This means that, if the MFR basis understates the cost of annuity purchase, pensioners will still get their annuity secured at the expense of lower order priorities. We will discuss priorities of liabilities further in Section 4 of this chapter.

SA4-14: Discontinuance Page 10a


2.5 Pensions Protection Fund (PPF)

Where a sponsoring employer became insolvent on or after 6 April 2005, members may be eligible to receive compensation from the PPF. The PPF is covered in further detail in Chapter 4.

2.6 Fraud Compensation Fund

The Fraud Compensation Fund provides compensation to occupational pension schemes that suffer a loss due to fraud. However, this would not be taken into account before determining the debt. From 1 September 2005 the Pensions Protection Fund Board assumed responsibility for the Fraud Compensation Fund.

2.7 Financial Assistance Scheme

The Financial Assistance Scheme was established by the UK Government on 14 May 2004 to provide some support to workers who are not covered by the PPF. The Scheme may provide some compensation for members of occupational pension schemes where the sponsoring employer became insolvent before 6 April 2005 but after 1 January 1997. More details about the Fraud Compensation Fund and Financial Assistance Scheme are included in Chapter 4.

2.8 Summary

Once the trustees know the amount of (and receive) the additional funds, the method of providing the benefits and the level of the benefits can be determined.

SA4-20: Options and guarantees


New transfer value regulations came into force with effect from 1 October 2008. These regulations do not explicitly deal with transfers-in but the Pensions Regulator has provided guidance. This guidance states that choosing assumptions consistent with the transfer out basis will usually be appropriate. However, the trustees could consider both the potential for selection and individual characteristics which are expected to have a bearing on the eventual cost of benefits. In Chapter 6 we described the types of benefits that may be offered in respect of a transfer value:

● a money purchase fund

● a fixed additional pension

● a salary-linked additional pension, eg by granting added years. Money purchase benefit If the offer is a money purchase benefit, assumptions are only required if (and when) the fund is to be converted to provide a pension from the scheme. In this situation a cautious approach would usually be appropriate, whilst recognising the terms on which annuities could be purchased externally. Members may complain if the conversion terms within the scheme are worse than those available from insurance companies. In practice, the terms are often very competitive because the scheme assumptions do not include a loading for profit or expenses. The assumed investment returns may also be greater for the pension scheme than for an insurance company’s annuity fund because of the higher level of equity investment. However, more limited options may be available within the scheme, eg a spouse’s/civil partner’s pension of 50% may need to be purchased to match the benefit structure of the scheme. Fixed additional pension If a fixed additional pension is offered, a sensible approach (which was a constraint in GN11 when it applied) was to ensure that the basis for calculating benefits for transfer values received was consistent with the basis used for calculating transfer values paid out. In practice, this means that a similar set of actuarial assumptions should be used. GN11 ceased to apply with effect from 1 October 2008 when the new regulations came into force. As stated above the Pensions Regulator has provided guidance which states that choosing assumptions to calculate transfer-in benefits consistent with the transfer out basis will usually be appropriate. We discuss the assumptions to be used to calculate transfer values in Section 2.

SA4-20: Options and guarantees Page 5


Added years If added years are to be offered, the requirements of GN11 (which is no longer formally applicable) stated that the basis for added years should be identical to that for transfers values paid out, but the inclusion of a salary scale is a fundamental alteration of the nature of the calculation. The gap i – e becomes a critical part of the basis used. Problems may arise if using a constant assumption for e with the market related value for i. In practice, added years calculations are often performed using the valuation basis, provided this is reasonably realistic. A market-related basis is also necessary as assets will be sold by the transferring scheme and will be bought by the recipient of the transfer value. Both of these transactions will take place at market value in cash. Some additional points need to be considered:

● Allowance for post-retirement pension increases in the added years calculation should be consistent with the allowance made for transfer values paid out.

● Allowance for withdrawals needs to be carefully considered, as does the benefit to be valued on withdrawal. If subsequent withdrawals are to be given an enhanced transfer value this should be allowed for in the calculation of added years, or alternatively, the withdrawal decrement could be omitted. What should not be done is to allow for withdrawal profits in the calculation of added years and also pay enhanced transfer values on subsequent withdrawal.

● The level of earnings growth for individuals choosing added years may not be the same as the average salary growth for all employees. The level of salary growth may be very different from the “average” assumption.

It will never be possible to allow exactly for an individual’s own future salary growth. However, the separate use of a salary scale should make the calculation more equitable between members at different ages and possibly reduce the selection against the scheme. If a non-flat salary scale were simply taken to be equivalent in value to, say, 1% pa added to the general salary growth assumption, the added years offered to the younger members could appear very generous and cause a strain on the scheme if accepted. The situation would be the reverse in the case of an older member, who might therefore choose not to transfer. GN11 ceased to apply with effect from 1 October 2008 when the new regulations came into force. As stated above the Pensions Regulator has provided guidance which states that choosing assumptions to calculate transfer-in benefits consistent with the transfer out basis will usually be appropriate.



AVCs For the purchase of additional pensionable service, the assumptions used might be similar to those adopted for the last actuarial valuation of the scheme. There will therefore be some prudence to protect the scheme against the risks of providing the guaranteed terms. However, a steeper promotional salary scale might be included because members who choose to pay AVCs for added years will probably anticipate faster salary growth, on average, than the active membership as a whole. In practice it is very difficult to get this assumption right. Although the added years formula is similar to that for transfers into the scheme, the latter will be based on market rates of interest at the time of receipt of the transfer value. Since AVCs are normally paid over an extended period (often the whole period up to retirement), it will be inappropriate to use the current market rate of interest at the time the AVCs commence. The assumptions used in the calculation of added years in respect of AVCs may not be market related. This reflects the view that the AVCs will be invested regularly in differing financial conditions and that the long-term investment return can be considered to be the average over the period in which the AVCs are paid.

Question 20.1

In what special circumstances might an actuary be most likely to use a market-related approach for the calculation of additional benefits in respect of AVCs?



2 Transfer values

2.1 Description of the option

As an alternative to the deferred pension, a leaver with vested benefits has the right to transfer the cash equivalent (ie the actuarial value) of the deferred pension to another pension arrangement.

2.2 Retirement Benefit Schemes – Transfer Values

The Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008 became effective on the 1 October 2008 and cover the calculation of transfer values.

These regulations introduce an “initial cash equivalent” (ICE) which is the minimum cash equivalent before any reduction for underfunding is applied. An alternative transfer value can be paid provided it is higher than this minimum amount. In summary:

● the ICE is calculated by taking account the expected cost to the scheme of providing the member’s accrued benefits

● the trustees are responsible for determining the assumptions to be used, having taken the advice of the Scheme Actuary

● the assumptions as a whole must lead to the “best estimate” of the cash equivalent

● the trustees should determine any allowance for discretionary benefits

● the trustees should determine any allowance for any favourable options (options which, if exercised by the member, would increase the value of their benefits)

● the trustees must have regard to the investment strategy of the scheme when setting the discount rate.

GN11 was withdrawn with effect from 1 October 2008. The Pensions Regulator has provided guidance in this area and it can be found on its website at: www.thepensionsregulator.gov.uk/guidance/transferValues/introduction.aspx



Actuarial value of deferred benefits Transfer values paid out should be no less than the expected cost within the scheme of providing the deferred benefits (referred to as the cash equivalent). Market-related basis Transfer values should be calculated having regard to the investment strategy of the scheme ie market rates of return on equities, gilts or other assets, as appropriate. This allows a minimum basis for transfer values to be specified without posing a threat to the security of the scheme through insensitivity to investment conditions and changes to the market value of assets. Market-related transfer values do not imply valuing benefits at today’s yields for each transfer value calculation undertaken. There are two main modifications to this:

● the yields expected to be available on the future reinvestment of investment proceeds should be considered, and

● many actuaries, rather than changing the interest rate daily, will change it only when it moves out of a band. The current yields are commonly taken to the nearest ½% or ¼%.

A market-related basis is necessary as assets will be sold by the scheme and will be bought by the recipient of the transfer value. Both of these transactions will take place at market value in cash. (A smoothed actuarial asset value is only ever appropriate when assessing long-term liabilities.) Accurate allowance for the effects of initial and reinvestment interest rates would require a cashflow approach. Despite this, many practitioners use a formula approach with a single rate of interest for each calculation. If yield curves are flat this approach will not be materially different.

Question 20.2

How could you end up with an overall interest rate higher than current gilt gross redemption yields? Is it likely?

Allowance for pension increases Pension increases that are promised in the scheme’s rules must be allowed for. Transfer values should also include an allowance for discretionary post-retirement pension increases, unless trustees direct otherwise.



Allowance for expenses Allowance may be made for the cost of calculating the transfer value. Expenses are also saved if a transfer value is paid out and the allowance should reflect this also. A common approach is to ignore both aspects of expenses in the calculation. Other assumptions Other assumptions may be in line with those adopted for the funding valuation or may be a little more realistic. Reduced transfer values in the event of a discontinuance shortfall A scheme can pay a transfer value lower than the value of the deferred benefits if the scheme has disclosed a discontinuance shortfall. The purpose of this measure is to protect schemes in very poor financial straits from further problems. The deferred benefits are not reduced in this circumstance. Any reduction in transfer values should consider the following:

● trustees must obtain an Insufficiency Report from their actuary before they can reduce transfer values

● any reduction must not exceed that set out in the Insufficiency Report

● the TPR suggests that:

– where an employer's covenant is strong and any funding shortfall is being remedied over a reasonably short period, trustees should not normally apply a reduction

– trustees should consider reductions where there are concerns about the employer's covenant over the term of an agreed recovery plan.

Question 20.3

What are the “further problems” that this measure protects against?

Previous individual transfer in It is no longer a specific requirement that the transfer value is equitable in relation to and consistent with the transfer value previously received. This will be particularly relevant when the incoming transfer value was used to provide added years.



See Section 1.2 above for more detail.

Question 20.4 If someone has previously received added years from an inward transfer value, the actuarial value of the deferred benefits based on those added years may look very mean on subsequent withdrawal. Why?

Previous bulk transfer in Similar theoretical points arise from bulk transfer values received, although any conditions on the calculation of subsequent individual transfer values would usually be found in the Sale and Purchase Agreement. If, for example, the selling company was worried that the transferring members might be sacked or made redundant in the near future, it might be agreed that the buying company’s scheme will give them enhanced benefits if this occurs. On the other hand, if, as is usual, the “added years” are calculated making allowance for withdrawals (ie everyone was granted more added years than would be the case for an individual transfer in), then no enhancement of subsequent individual outward transfer values will be needed. Transfer clubs GN11, when applicable, allowed different transfer value calculations if there was a transfer club. A transfer club is an agreement between schemes to treat transfers between themselves in a special way. For example, they may give year for year credits automatically. A transfer club could involve high or low transfer values relative to normal transfer values. GN11, when applicable, only specified a minimum, and values higher than those specified were permitted. The main aims of transfer clubs are to ensure that transferring members’ benefits continue to be linked to salary at retirement and to simplify the administration involved in calculating, paying and receiving transfer values. Transfer clubs are very rare in the private sector in the UK, but more common in the public sector where there is effectively a common scheme sponsor – the State.



The discount rates to be used for public service pension schemes will not be calculated under these Regulations. They will be calculated in accordance with guidance prepared by HM Treasury. In addition, the GAD has updated the Public Sector Transfer Club factors.

Question 20.5

Why are transfer clubs rare in the private sector?

Size of transfer values In general, the trustees have a duty to act impartially between different classes of beneficiary. This will have an influence on any allowance for discretionary benefits, such as post-retirement pension increases. The trustees should not sanction an allowance for a low level of pension increases in the transfer value if they fully expect higher increases to be paid to members who choose not to transfer their deferred benefits. The actuary is bound by the decision of the trustees when calculating the transfer value.

2.3 Assumptions and methods

We are now in a position to describe the method and basis for calculating outward transfer values. TPR’s guidance states that ‘Trustees must have regard to their investment strategy when choosing assumptions’ and that the transfer basis should be an overall best estimate. Investment return The approach to the interest rate may be more or less sophisticated.

● The calculation might be performed using a single interest rate, with actuarial judgement being applied to select an interest rate which makes suitable allowance for current yields and reinvestment conditions.

● A model with two interest rates might be used – a variable initial interest rate and a constant reinvestment rate.

● A spot rates approach could be used, with a variable initial interest rate reflecting current yields and a specified future pattern of reinvestment rates based on expected future yields.



Mortality To calculate the value of a deferred pension, several mortality assumptions will be required:

● mortality before retirement, which affects the probability of receiving the pension and the value of any death in deferment benefits

● mortality in retirement, which affects the value of the pension in payment and the value of any contingent dependants’ pensions

● mortality of dependants, which affects the value of any dependants’ pensions. It is important when calculating transfer values to correctly anticipate mortality after retirement (since the transfer value must represent the value of the accrued benefits). After adjusting for expected future improvements in longevity, tables based on PMA92 or PFA92 could be used for pensioner, widow and widower mortality. Pre-retirement mortality rates are also important, since the value of benefits on death in deferment will often be lower than the pension benefit, but do tend to be less significant. However, in many cases for pre- and post-retirement mortality, there is no ideally suitable standard table.

Question 20.6

Comment on why the following standard tables may be inappropriate for use in transfer value calculations: ELT15, AM92, PMA92/PFA92 and PA(90).

Pension increases The guidance states that guaranteed pension increases must be allowed for and discretionary increases may be allowed for. If the pension increases are guaranteed to be in line with LPI increases and inflation is ever expected to be lower than the limit (ie 5% pa for benefits accruing between 6 April 1997 and 5 April 2005 and 2.5% pa for benefits accruing after 5 April 2005), the appropriate assumption is below the relevant limit.



A stochastic approach is the only method of determining a suitable assumption to use in a deterministic calculation. Depending on the central value of the inflation parameter and on its volatility, the appropriate assumption for pension increases if 5% LPI increases are given might be 4½%, 4% or lower. Increases in deferment The normal basis for revaluation in deferment for the pension in excess of the GMP is 5% pa (2.5% pa for benefits accrued post April 2009) or RPI if less. This is determined over the whole period rather than each individual year as for 5% LPI/ 2.5% LPI increases to pensions in payment. Note that if inflation is expected to be both higher and lower than 5% (or 2.5% as relevant) at some point in the future, the appropriate assumption for revaluation in deferment will be higher than the corresponding assumption for 5% LPI (or 2.5% as relevant) increases in payment.

Question 20.7

If the RPI increases by 3%, 7% and 6% in three consecutive years, how will the following pensions increase:

(i) a pension in payment with LPI 5% increases

(ii) a deferred pension with LPI 5% statutory revaluation?

2.4 Pension sharing on divorce

The UK Government introduced legislation to allow for the sharing of pension rights following divorce. This legislation enables pension sharing to be implemented for divorce or nullity proceedings commencing on or after 1 December 2000. Pension sharing is not compulsory. The parties concerned will need to decide the amount of pension to be shared. All occupational and personal pension rights, including SERPS and S2P rights, will be subject to pension sharing apart from survivors’ pensions payable as a result of a previous marriage. The sharing of pension rights will result in a pension debit being set up against the member’s benefits.



If the scheme allows it a corresponding pension credit will be set up with the scheme for the ex-spouse. This will be treated in a similar manner to a deferred pension. However, a new category of membership will need to be established for such individuals. The ex-spouse can take a cash equivalent of the pension credit to another arrangement. Schemes are not obliged to retain the ex-spouse’s benefits with the scheme as a pension credit. In such cases a cash equivalent will be payable. In cases where the ex-spouse does not nominate one, the scheme trustees will need to identify a suitable arrangement to receive the transfer value in respect of a pension credit. Pension sharing is an alternative to “earmarking” where some of the member’s pension is diverted and paid to the ex-spouse. Under the “earmarking” system, the ex-spouse cannot take a cash equivalent out of the scheme and will only receive the diverted element of the pension for as long as the member remains alive and in receipt of the remainder. Pension sharing represents a clean break. In order to share the pension, the value is established using a cash equivalent basis. It is then split between the two parties. The ex-spouse is given the appropriate share of the cash equivalent to take elsewhere or might be given the option to use the cash equivalent to secure a benefit in the original scheme. The member’s pension is reduced by the deferred pension equivalent of the cash equivalent paid to the ex-spouse. We noted in Chapter 3 that for the purposes of determining an individual’s LTA, the member’s pension rights given up to the ex-spouse should be excluded from the member’s LTA calculation but should be included in the ex-spouse’s LTA calculation. Where the member is seeking to protect his or her benefits via the primary protection route described in Chapter 3, their “enhanced LTA” should take account of the reduction in benefits.



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GN19: Retirement Benefit Schemes - Winding-up and Scheme Asset Deficiency

Classification Practice Standard

MEMBERS ARE REMINDED THAT THEY MUST ALWAYS COMPLY WITH THE PROFESSIONAL CONDUCT STANDARDS (PCS) AND THAT GUIDANCE NOTES IMPOSE ADDITIONAL REQUIREMENTS UNDER SPECIFIC CIRCUMSTANCES

Introduction

Version 4.9 of GN19 is introduced to clarify the application of GN19. In particular, GN19 will no longer apply in relation to any scheme that started to wind-up on or after 1 December 2008. The reason for the change of application is that the legislation relevant in these circumstances no longer needs to be supplemented by an actuarial guidance note.

Application

GN19 is not applicable in respect of:

(i) wind-up calculations for schemes that started to wind up on or after 1 December 2008; or

(ii) deficiency calculations for schemes where the deficiency is being calculated as at a date after 5th April 2008.

In such cases:

(a) the Occupational Pension Schemes (Employer Debt) Regulations 2005, SI 2005/678 (‘the Deficiency Regulations’), as amended by the Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2008. SI 2008/731; and/or

(b) the Occupational Pension Schemes (Winding up etc.) Regulations 2005. SI 2005/706 (‘the 2005 Winding Up Regulations’); and/or

(c) other relevant legislation including amendments to (a) and (b) above,

will apply.

Northern Ireland has its own body of law relating to pensions and, in relation to Northern Ireland, references to the Great Britain legislation contained in this Guidance Note should be read as including references to the corresponding Northern Ireland legislation.

Version 4.8 of GN19 remains applicable to any Scheme Actuary responsible for giving advice to the trustees of any UK pension scheme to which the 2005 Winding Up Regulations or the Deficiency Regulations apply; broadly any scheme that, on or after 6th April 2005, started to wind-up or has an employer which, between 6th April 2005 and 5th April 2008, became insolvent or ceased to participate in the scheme.

GN19 V4.9 B19.1

Version 4.5 of GN19 remains applicable in respect of priorities on winding up for pension schemes that started to wind up before 6th April 2005 and in respect of deficiency calculations for schemes where the deficiency is being calculated as at a date before 6th April 2005. Version 4.5 is found at Appendix B to version 4.8.

Version Effective from 1.0 01.04.932.0 01.10.933.0 01.02.964.0 06.04.974.1 01.03.984.2 19.03.024.3 15.03.044.4 10.05.044.5 15.02.054.6 06.04.054.7 02.09.05

Adopted by the BAS on 06.04.07 4.8 06.04.084.9 01.12.08

© The Financial Reporting Council Limited

GN19 V4.9 B19.2

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