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Session H4-PD How to make commuted values work

Session H4-PD How to make commuted values work. Martin Cyrenne , FCIA. Agenda. PPFRC Q&A Recent Queries Solvency valuations. PPFRC. PPFRC is a Committee under the Practice Standards Council (PSC) CV Standard was developed by PPFRC. Q&A.

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Session H4-PD How to make commuted values work

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  1. Session H4-PDHow to makecommuted values work Martin Cyrenne, FCIA

  2. Agenda • PPFRC • Q&A • Recent Queries • Solvency valuations

  3. PPFRC • PPFRC is a Committee under the Practice Standards Council (PSC) • CV Standard was developed by PPFRC

  4. Q&A • A list of questions on commuted values will be posted on the CIA website • Q&A is intended to help pension administrators and members on general issues related to the CV Standard • Q&A to be posted for a year

  5. Queries - Reflecting Indexing Either Implicitly or Explicitly • Under the new CV Standard, determining commuted values of indexed annuities may be done either implicitly or explicitly. Can this result in two different commuted values for the same pension?

  6. Queries - Reflecting Indexing Either Implicitly or Explicitly • Implicit indexing implies that future payments are projected without indexing and are then discounted using a net interest rate • Explicit indexing implies that future payments are projected including indexing and are then discounted using the non-indexed interest rates

  7. Queries - Reflecting Indexing Either Implicitly or Explicitly • PPFRC’s view is that the two methods should produce identical results • The new CV Standard clearly describes how the interest rates should be determined when assuming implicit indexing • Generally, identical results can be achieved using an explicit approach if the underlying inflation rate is calculated by reference to the rounded rates (and is itself not rounded)

  8. Queries - Reflecting Indexing Either Implicitly or Explicitly • The new CV Standard appears to permit the use of an explicit approach for fully indexed pensions only (and not for partially indexed pensions) • Given PPFRC’s view that the two approaches should produce identical results, the use of an explicit approach would be acceptable under the new CV Standard

  9. Queries - Indexing Adjustment Under the New CV Standard • What rate of inflation should be used when adjusting for annual indexing?

  10. Queries - Indexing Adjustment Under the New CV Standard • Sentence being questioned is: • “For example, in the situation of monthly payments, annual indexing, and with the first annual adjustment a year from now, the resulting annuity factor could be adjusted by multiplying it by[1 – 11/24 * u]” • Technically, the value of “u” should likely be determined based on a weighted average of the timing of future payments • However, such an interpretation would require a different “u” for each member

  11. Queries - Indexing Adjustment Under the New CV Standard • PPFRC believes actuaries should use judgment in determining an appropriate value for “u”, keeping in mind the immediately preceding sentence of the new CV Standard, which states: • “Reasonable approximations may be used …” • Under the new CV Standard actuaries may also apply “reasonable approximations” with any other type of indexing formula

  12. Solvency valuations • 31.12.2004 solvency valuations

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