Page 103 - Group Insurance and Retirement Benefit IC 83 E- Book
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pensions already purchased. The cost of past service pensions at the inception of a
scheme is generally quoted separately as a level installment, being coasted on normal
Indefinite Funding principles.
If the scheme is discontinued after it has been in operation for some years, the pensions
purchased for members in service will, if reallocated among all members, approximately
match the accrued pensions. The match will not be perfect: only Single Premium costing
will produce an exact match. In order to minimize the risk of the discontinuance benefits
falling below the accrued level, it may be thought desirable to quote a rate of premium at
the inception of the scheme which is not less than the initial cost on the Single Premium
basis: this precaution will in general only prove necessary in cases where the projected
Single Premium cost is below the initial Single Premium cost over much of the control
period.
(2) Final salary schemes
The general principle of funding over n years the benefits which will have accrued by the
end of n years is also appropriate in the case of final salary schemes. In estimating these
benefits, assumptions must be made about future salary increases, and these assumptions
should be agreed with the employer.
Service up to the end of the control period is taken into account, and accrued pensions
may be related either to projected final salaries or to projected salaries at the end of the
control period: the latter assumption results in funding at what may be described as the
discontinuance level, comparable to that used for graded schemes, whereas the former
results in a higher level of funding. If the assumptions are borne out in practice, future
recasting (projecting over a new n-year period) will tend to show a gradual reduction in
cost if projected final salaries are used, and a more stable cost if salaries are only
projected to the end of the control period.
The cost of a final salary scheme is normally expressed as a percentage of total
pensionable payrolls, and the function used in spreading the cost takes account of the
trend of future payroll assumed in the calculation of the single premium liability.
There may be some advantage in quoting a separate level Installment in respect of past
service at the inception of a scheme as this will result in a more stable normal rate of
