Page 96 - Group Insurance and Retirement Benefit IC 83 E- Book

It is necessary to forecast the way in which the allocation of premiums will work out, and

to test that the premium installment is sufficient to ensure that no employee can reach
normal pension date before the purchase of his pension has been completed, even if there

are no deaths or withdrawals. If all employees do remain in service, the purchase of
pensions may take a year to two longer than the estimated period.

Single Premium Definite Funding

The single premium cost is calculated and spread over a period in the same way as for
Indefinite Funding. The premiums are regarded as true installments, payable for a fixed

period, and each employee's pension is thus purchased by installments. If an employee
dies there is no reduction in the installment unless the costing basis provides for a return

of premiums on death; on withdrawal the installment is reduced for the future and a
surrender value is paid in respect of the pension already bought. Care must be taken by

the Life Office to ensure that it is adequately protected in the event of premium payments

being discontinued.

The third method is the least used in practice, presumably because of the discontinuance

position. Indefinite Funding is generally used if the number of employees is substantial,
because it ensures a uniform cost for a more or less known period. Analysis of the future

service methods in analyzing the costing basis for a group pension scheme, a number of
factors need to be considered, among the most important of which are initial cost, future

cost, turnover and discontinuance. These will now be considered in turn in relation to the
Single Premium and Annual Premium methods, as applied to graded schemes; the

conclusions will then be interpreted in relation to final salary schemes.

(1) Initial cost

Initial cost is an important factor in competition which must not, however, be considered
out of context. A low initial cost may be achieved at the expense of a high future cost:

conversely, a high initial cost may lead to a reduction in the future. The former state can
arise with Single Premium costing when applied to a relatively young staff; in the

extreme case of a male staff all aged under 35, with employees contributing at the rate of