Page 107 - Group Insurance and Retirement Benefit IC 83 E- Book

(3) 'With-profits' schemes

If a scheme is arranged on a 'with-profits' basis, part of the bonus can be anticipated in

the costing. This is an advantage both from the point of view of stability of cost and of
competition with a 'non-profit' scheme. If bonuses are declared in cash, they are normally

retained and treated as additional premium; if they are declared as an addition to pension,
the amount of pension to be purchased is reduced. This aspect of Controlled Funding has

proved to be one of the strongest motives for its increased adoption in recent years as a

standard method of costing. It should, however, be stressed that Controlled Funding is not
a sine qua non of 'with-profits' schemes in general.

A detailed discussion of this subject is contained in a paper by M. D. W. Elphinstone and

M. W. Melton, 'With-Profits Group Pension Schemes' (T.F.A. 23, 85). Controlled
Funding as a costing method for group pension schemes possesses greater flexibility and

assures greater stability of cost than Single Premium and Annual Premium costing,
particularly for graded schemes for salaried staff, and for final salary schemes. It is

particularly valuable for 'with-profits' schemes. Its principal disadvantage is that it is not
easy to explain to employers, nor indeed to the selling organizations. It may therefore

prove difficult to sell—particularly when applied to final salary schemes, for which its

use is especially desirable. It is not really suitable for the smallest schemes.
Life Offices differ considerably in the ways in which they apply the method; it is

therefore unlikely that the views expressed in this paper will go unchallenged. If, taken
with the discussion which will follow, it leads to a wider understanding of the method

and its applications, it will have served its purpose.