Page 104 - Group Insurance and Retirement Benefit IC 83 E- Book

premium, particularly if the past service installment is designed to meet only the past

service liability on the basis of salaries at inception (the past service liability in respect of
future increases in salary being included in the normal rate of premium). Practice varies

considerably between Life Offices in the assumptions made in costing final salary
schemes, and it must be recognized that these are largely a matter of individual judgment.

Nevertheless it is important not to underestimate the probable effect of future salary
increases; if the standard of living is to be doubled in the next 25 years, it is unlikely that

present levels of salary will remain stable.

The value chosen for n should not be so short that the stability of the cost is jeopardized
nor so long that undue weight is given to benefits and contributions in respect of

replacements, or that the discontinuance level of funding takes too long to achieve. If the

Value of n is varied from scheme to scheme there are practical difficulties of explanation
and administration, and it is not uncommon to choose a fixed period such as 20 years.

The effect of withdrawals and deaths on the level of funding It is usual to take no specific
account of withdrawals in determining the level of cost to be paid by the employer.

Withdrawals will certainly occur, and their individual effect on the funding of the scheme
may vary considerably in different circumstances.

In the case of a graded scheme, there may be a release of employer's liability in respect of

accrued benefits if the employee is only granted the benefit of his own contributions, and
this will speed up the rate of funding. Any such release will probably be small, since it is

usually the younger employees who withdraw, and there will be no release if the
employee's contributions have over secured the accrued benefits. In respect of future

service, there will be a release of employer's liability for older withdrawals, the value of
whose future benefits forfeited is greater than the value of the future premiums and

contributions (i.e. at the average rate for the scheme) which will not be paid. For younger

withdrawals the reverse will apply, and there will be a strain on the funding. If, however,
as is normally the case, withdrawing employees are replaced by younger new entrants,

this strain will usually be fully counterbalanced, even allowing for the lower salaries of

the replacements, by the excess of the value of their future premiums and contributions
over the value of their future benefits.