Page 99 - Group Insurance and Retirement Benefit IC 83 E- Book
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contributions and the return of contributions made; this is insufficient to cover expenses
in respect of withdrawals at short durations.
(4) Discontinuance
On the discontinuance of a scheme for which Single Premium costing has been used, the
pension secured for each member is the scale pension which has accrued (or the pension
purchased by his own contributions, if greater). If Annual Premium costing has been
used, the pension secured exceeds the scale pension accrued in every case.
Summing up, Single Premium costing is economical, and the level of funding matches
the accrual of pensions. It does, however, lack stability, and the smaller the scheme, the
greater the instability. Annual Premium costing is expensive, and the level of funding is
correspondingly higher, but for small schemes it provides greater stability. Each method
has its weakness, and each is inflexible in that it is not possible to make allowances for
predictable future trends and hence ensure greater stability.
Whereas a graded scheme can be coasted satisfactorily without any allowance for normal
future salary increases (the rate of accrual of pensions, and hence the cost, increasing
more or less proportionately to pensionable salaries when such increases occur), this is by
no means the case for a final salary scheme. If the costing basis makes no allowance for
future salary increases in such a scheme, the effect of such increases is likely to be a
sharp rise in the cost of the scheme in terms of the percentage of pensionable pay- roll.
The following example, in which the build-up of a final salary pension is translated into
graded form, illustrates this point: An employee joins a scheme at the age of 25.
His pension at 65 is 1 % of his salary at 60 for each year of membership. His salary at
entry is £500, and his progression through the scheme is as follows:
