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By PIUS APERE
Individual projections
Once a defined contribution scheme is in place, projections may be carried out for various purposes (e.g. to test maximum funding, to test for the maintenance of prior expectations or predict what proportion of the emerging benefit will be to the final projected salary).
Section 4(1) of the PRA 2014 sets the compulsory level of contributions at quite a modest level so that individual members can make additional contributions into the scheme. Furthermore, individual members of a pension scheme should ideally have access to regular actuarial calculations of their own projected benefits, with a view to determine whether additional voluntary contributions(as required in section 4(3) of PRA 2014) would be needed in order to give a reasonable probability of achieving the level of pension they desire.
Guarantees
Section 84(1) of the Act states that holders of Retirement Savings Account (RSA) who have contributed to a licensed PFA for a number of years are entitled to a guaranteed minimum pension as may be specified from time to time by PENCOM. This guarantee is usually a form of underpin applicable in a defined contribution scheme which has the main benefit that is defined contribution in nature, with a promise that the benefit will be at least a defined benefit amount, usually a percentage of final salary at retirement date. This guarantee is normally used to protect the members against some of the risks of low investment returns, particularly in the event of exceptionally poor investment conditions, for instance, during the global economic crisis in 2008.
Furthermore, a more generous guarantee may also be applied on a temporary basis after a conversion of a scheme from a defined benefit form to a defined contribution form. Thus, this should be very appropriate at anytime a scheme conversion is being made since after the introduction of the (CPS) in 2004. The responsibility for making good the guarantee rests with the PFA and PENCOM, as the liability of the pension fund itself is limited to the value of the assets held in the individual Retirement Savings Account (RSA). A Pension Protection Fund (PPF), as stated in section 82 of PRA 2014, is to be established and maintained by PENCOM in order to fund the minimum guaranteed pension. However, the assessment of the cost of guarantees (using stochastic modelling techniques) becomes an issue for capital adequacy and financial management of the PPFs with guidelines to be issued by PEMCOM and this is clearly a task which should be under the control of an actuary.
Investment management
One of the most important functions in a defined contribution pension scheme, no matter what the legal structure, is the management of the investments. Strategic investment decisions should be made on the basis of a thorough understanding of the trade-offs of risk and return and in the light of clear investment objectives for the fund, including a clear understanding of the risk profile.
Individual funds may have different risk profiles, particularly where pension funds are allowed or encouraged to offer a choice of funds, in order to satisfy different risk appetites of scheme members or to enable them to tailor their pension investments to the duration profile of their employment and retirement prospects (life-style investment strategies).
Actuaries should typically have a part to play in strategic investment decision-making, bringing to bear skills in asset-liability modelling and stochastic modelling of investment portfolios in order to inform the decision-making process. Thus, an actuarial advice is needed by the Investment Strategy Committee, which is to be established by every PFA under section 78 of PRA 2014, in carrying out its functions. In addition, actuaries can also provide PENCOM with an independent assessment of the appropriateness of PFAs investment strategies.
Risk management
The essence of a switch from defined benefit (DB) scheme to CPS is the transfer of risk from the employer to the employee. In this context, risk is the volatility of the standard of living (which could be measured in terms of replacement ratio or real income) that each employee can maintain in retirement by virtue of being a member of the CPS. It is important that employees understand this message, and the actuary has a pivotal role to play in the effective management of this risk.
However, there is a role for the actuaries in projecting the range of pension benefits which could be reasonably and/or realistically expected to emerge from a given contribution rate, taking into account the inflation, the variability of expected pension and the investment funds selected
Other objective of the CPS design is the desire by the employers to reduce pension cost. The pension cost is an integral part of the overall employment benefits package and therefore there is a risk of reduction of some other employment benefits (such as healthcare benefit) by employers as the pension cost, the contribution(s), has been increased in the new law, as stated in section 4(1) of PRA 2014. Thus, I presume that the new contribution rates were arrived at having considered the overall financial and actuarial implications. An actuarial advice would also assist the Risk management Committee (which is to be established by every PFA, as stated in section 78 of PRA 2014) in carrying out its functions.
Performance Measurement
In many countries actuaries have led the way in the development of sophisticated tools for measuring and monitoring the performance of investment managers. Performance measurement services should be independent of the fund managers (PFAs) so that they can be seen to be fully objective. Actuaries also benefit from being able to track the performance of a significant number of the investment managers within a market, in order to make comparisons. Regular performance measurement reports should be made available to the managers of a pension fund and to the trustees or directors who have accountability for the scheme under the respective corporate governance structure. These should then be used as a major part of the process of holding the investment managers to account and making decisions on choice of investment manager. Actuaries can assist employers in the choice of their PFAs and PFCs.
Annuities
The purchase of an annuity is a way of transforming accumulated savings (RSA) into a regular pension, which will also provide a guarantee of continued payment throughout the remaining lifetime of the individual. An actuary must be responsible for the pricing of annuities at retirement age or at any other point at which an annuity can be purchased. Pricing annuities requires assumptions to be made about future levels of mortality rates for the group of individuals who have purchased annuities, the appropriate rate of interest to use and the expenses of paying out annuities. The subsequent reserving requirements of the annuity portfolio should also be under the control of the actuary, together with all aspects of the financial management of the pension annuity company (e.g. life insurance company. Section 7(1)(c) of PRA 2014) states that the guidelines for regulating the purchased life annuity business are to be issued jointly by NAICOM and PENCOM. This means that PENCOM also requires an actuarial advice in order to carry out its responsibility.
Source: BusinessDay
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