Page 105 - Group Insurance and Retirement Benefit IC 83 E- Book
P. 105
The net effect of withdrawals and their replacement by new entrants on the rate of
funding of a graded scheme is not likely to be large, particularly if full vested rights are
granted, but in general the rate of funding will tend to be accelerated. If the withdrawals
are not replaced the cost of the scheme will tend to rise in relation to pensionable salaries.
For a final salary scheme a similar result can be deduced. Because a replacement will
only accrue benefits in respect of his service subsequent to joining the scheme, whereas
the withdrawing employee would have accrued additional benefits in respect of his
previous service whenever a salary increase occurred in the future, the effect of
withdrawals and their replacement by new entrants will be rather more pronounced than
under a graded scheme.
An allowance for mortality is normally made in calculating the value of future benefits
and of future contributions, and the rates of premium on which allocations are made will
themselves allow for mortality. If mortality is heavier than expected at ages where no
employer's premiums have been allocated, the effect will be similar to that created by
withdrawals at the same ages. In addition, at ages where employer's premiums have been
allocated there will be a mortality loss in respect of premiums already paid which, in the
case of Single Premium Controlled Funding in particular, could exceed the release of
employer's liability if employer's premiums were applied on the basis of no return on
death, if benefits had been purchased which had not yet accrued. For this reason, it is
usual to allocate such premiums on rates which provide for a return without interest on
death; this reduces the mortality loss to the difference between the reserve value on the
premium basis of the benefits secured and the amount of premium refunded.
Other features
Apart from its stabilizing effect on the cost of a scheme, Controlled Funding introduces a
degree of flexibility which cannot be achieved with Annual Premium or Single Premium
costing. Features generally associated with Controlled Funding, in which this added
flexibility is apparent, include the following:
