Professional Documents
Culture Documents
Outline of Chapter 1
sonal pensions)
OPS
Pension (BSP))
retirement
Explanations:
Living costs are lower in retirement (e.g.
retirement
NS
= 60
at
years
tirement
40 S = 2 S
= 60
3
at re-
Lump Sum
Spouse's Pension
=>
Lump Sum
Deferred
Pension or Return of Contributions
=>
Remarks:
Pensions are not only paid on age re-
tirement
num
N Average Salary
Example 2: Pension = 80
Current Salary
= 4
Pensionable Salary
Salary used to calculate the contributions and benets
Example: Pension salary = Basic salary
to retirement
Objectives:
Calculate the amount of money we need
Active (a)
Active (a)
Dealth (d)
Active (a)
Withdrawal (w)
Service Table
A multiple decrement table with the decre-
and
wx, where l is the radix of the table
associated with the entry age
rx, ix, dx
Notation:
Dier from standard multiple decrement
notation
x+t
aa
aa
tpx = lx = tpx
| In service at age
r
x+tx+t+1
ar
x) = tpaa
x 1 px+t
= x+t
lx
p
=
1 x+t
x
lx
service at age x)
p
1 x+t
x
lx
| In service at age x) =
wx+t
lx
aa
aw
tpx 1 px+t
Age retirement
Normal retirement age (NRA) = 65
Everyone must retire
Normally retire by age 65
Early retirement: Allowed from 60 to 65
Salary Scale
OPS benets are related to salary
Salaries increase over time due to
1. Ination
2. Promotion
3. Merit
4. Experience
A promotional salary scale,
sx
is set up
sx+t
sx
Salary Earned x + t x + t + 1
Salary Earned x x + 1
provided that the employee is in service
in the entire period
= E
Solution:
s18 =
s19 =
s40 =
time interval
payment
and x + t
Z t
0
(Salary
x and
x + 1/2
age 30 is 20,000 and salary rate increases by 4,000 at age 30.75. Calculate the salary earned between ages 30
and 31.
Solution:
or past salaries
y = Age
at retirement
x = Current
n=3
x1x
age
Then,
=
Expected FPS
!
sy1
sy2
sy3
1
SAL
+ SAL
+ SAL
SAL
sx1
zy
sx1
sx1
sx1
a deterministic model
Life annuities
Dx = v xlx
survivors
= Discounted number of
Nx = Dx + Dx+1 + Dx+2 . . .
Sx = Dx + 2Dx+1 + 3Dx+2 = Nx +
Nx+1 + Nt+2 + . . .
Life insurance
Cx = v x+1dx
deaths
= Discounted number of
Mx = Cx + Cx+1 + Cx+2 + . . .
Rx = Cx +2Cx+1 +3Cx+2 + = Mx +
Mx+1 + Mx+2 + . . .
x
Recall that Ax = M
Dx and that (IA)x =
Rx
Dx
FPS for each year of service. Suppose a member joined this scheme aged
x and he is now aged y . Assume the
NRA is 65. What is the member's
1. past service pension ?
1
60
Solution:
Past Service = y x
The member has already earned a pension of yx
60 FPS, which is payable
from age 65
Suppose the future service is F
Then, the member will earn a pension
F FPS, where y + F is the age
of 60
when the member leaves the service
or scheme
Note that F
[0, 65 y]
vice)
Member
x =
n =
SAL
NRA
Current age
Past service
Salary earned
= 65
General rule:
1 (t < 65 x)
Discount
= Amount Probability
the year
n SAL zx+t+0.5
Past service pension = 60
sx1
Probability
= x+t
lx
Discount factor
x+t+0.5
= v t+0.5 = v v x
Therefore,
!
EP V
zx+t+0.5
n
SAL
=
60
sx1
!
r
arx+t+0.5 x+t
lx
!
v x+t+0.5
vx
z C ra !
n
x+t
=
SAL
,
60
sx1Dx
x + t < 65,
!
EP V
When
z
n
SAL x+t+0.5
60
sx1
!
rx+t
r
ax+t+0.5
lx
!
x+t+0.5
v
vx
z C ra !
n
x+t
=
SAL
60
sx1Dx
x + t = 65,
!
n
z65
EP V = =
SAL
ar65
60
sx1
!
!
65
r
v
65
lx
vx
!
z
ra
C65
n
=
SAL
,
60
sx1Dx
ra = z
where z C65
ar65 r65 v 65
65
Remarks:
Retirement at age 65 is at the exact age
Retirement before age 65 occurs at age
x + t + 0.5
65x z ra !
Cx+t
t=0
n
SAL
60
sx1Dx
!
z
ra
Mx
n
=
SAL
,
60
sx1Dx
Solution:
Future service
Retirement can occur at any age y, where
x < y 65
1
2
one
Then,
=
ar 1
SAL
y+
60
y=x
y+ 1 !
sx1
!
z
1
1 x+
ry
v 2
r
2
a
1
x+ 2
lx
vx
2 sx1
!
!
!
1
z65
rx
r65
r
2
v +
a65
lx
sx1
lx
#
v 65x
=
SAL
where
P64 z ra
1 z C ra + z C ra !
C
y=x
y
x
65
2
60
s
Dx
!
! x1
!
1
1
z Mxra z Cxra
60
sx1Dx
2
z M ra = P65 z C ra
x
y=x
y
SAL
Write
zM
xra = z Mxra 1 z Cxra
2
Then,
=
zM
60
sx1Dx
Hence,
FSL
64x
X
SAL
1
zM
ra
x+t
=
60
sx1Dx
t=0
!
1
SAL z Rra ,
=
x
60
sx1Dx
zM
ra
where z Rxra = P64x
t=0
x+t
Rx
Ill-health retirement
The EPV of past service benets paid
in year t t + 1
!
z
n
SAL x+t+0.5
aix+t+0.5
60
sx1
!
ix+t
v t+0.5
lx
!
z C ia !
n
x+t
=
SAL
60
sx1Dx
P64x z ia !
Cx+t
t=0
n
SAL
60
sx1Dx
!
!
z
ia
n
Mx
=
SAL
,
60
sx1Dx
where i65 = 0
P SL =
Also,
F SL
z M ia 1 z C ia !
64x
X
1
x+t
x+t
2
SAL
=
60
sx1Dx
t=0
P64x z ia !
M
t=0
x+t
1
=
SAL
60
sx1Dx
!
z
ia
x
R
1
SAL
=
60
sx1Dx
annum
ix+t
i
= nP
ax+t+0.5
lx
ia !
Cx+t
= nP
Dx
v t+0.5
ia !
64x
X Cx+t
t=0 Dx
!
ia
Mx
Dx
ia 1 C ia
Mx+t
2 x+t
64x
X
t=0
!
ia
x
R
Dx
Dx
Cyi = iy v y+0.5
Mxi
P SL = n L ( Dx )
xi
R
F SL = L ( Dx )
(Why?)
(Why?)
Age retirement
If
y < 65 Cyra = v y+ 2 ry
ar 1
y+ 2
If
ra = v 65 r
y = 65, C65
ar65
65
65x
X
ra + LC r
P Cx+t
x+t
Dx
t=0
!
ra
r
P Mx + LMx
Dx
64x
X
ra + LM
r
PM
x+t
x+t
Dx
t=0
xra + LR
xr
PR
Dx
x0 =
P SAL =
Future Service:
Ill-health
Age retirement
Dx
Ill-health
EPV of future service benets accrued
in ANY future year
X SAL
1 64x
=
sx + sx+1 + +
60 t=0 sx1
!
ix+t
1
i
ax+t+0.5
sx+t1 + sx+t
2
lx
v t+0.5
=
SAL
64x
X
60sx1Dx t=0
ia
Cx+t
sx + sx+1 +
1
+ sx+t1 + sx+t
2
Summation
!
1 ia
ia + + C ia
= sx Cx + Cx+1
64
2
!
1 ia
ia + + C ia
+ Cx+2
+ sx+1 Cx+1
64
2
!
1 ia
+ + s64 C64
2
=
=
64x
X
t=0
64x
X
ia
x+t
sx+tM
sM
ia = s R
x+t
xia
t=0
Hence,
SAL
F SL =
60
sR
xia
sx1Dx
Age retirement:
SAL
F SL =
60
sR
xra
sx1Dx
Contributions:
The employer (and often the employee)
Salary-Related Contributions:
k = Contribution
as a percentage of salary
sx+t
k
SAL
100
t=0 sx1
!
!
x+t+0.5
lx+t+0.5
v
lx
vx
!
k
SAL
100
!
=
=
P64x
t=0 sx+tDx+t+0.5
sx1Dx
P64x
x+t
sx+tD
t=0
sx1Dx
P64x s
x+t
D
t=0
sx1Dx
sN
x
k
SAL
100
!
k
SAL
100
!
k
SAL
100
sx1Dx
Fixed Contributions
F = Contribution payable continuously (
per annum)
64x
X
t=0 !
lx+t+0.5
lx
v x+t+0.5
vx
x
N
= F
Dx
x
N
Return of Contributions
On death or withdrawal, a return of employee contributions accumulated with
k
ASAL
100
j M w +j M d
x
x
(1 + j)xDx
k
SAL
100
sj R
xw + sj R
xd
(1 + j)xDx
Check Yellow Tables, Pages 148 149, Page 148 for death and Page
149 for withdrawal, accumulated in-
p.a.
Hints:
Construct a service table
Dene a promotional salary scale
Evaluate the EPV of past service bene-
End of Chapter 1