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No of members 300
Amount of pension pa
(including indexation up to 31st December 1998) $9,300,000
Liabilities $82,404,000
Assets $82,404,000
(a) Investment income would be earned at the rate of 7% pa, and pro rata for
fractions of a year (ie assume simple interest for periods of less than a year)
(b) Inflation as measured by the Consumer Price Index would be 3% pa, and
pro rata for fractions of a year
(d) There would be 12 deaths in 1999, occurring evenly throughout the year.
[2] (i) Show that if the expected surplus for 1999 is zero, the expected liabilities
at the end of the year are $78,502,050
(b) The CPI rose 2% in the first six months of the year, and a further 2.1% in
the second six months, giving a total increase for the year of 4.142%
(d) There were 10 deaths in 1999, of which 7 occurred in the first six months
of the year
At the end of the year the assets were 79,617,693 and the liabilities, on the
same basis as before, were 79,923,629
Analyse the experience profit into the contributions from interest, inflation and
mortality, in that order.
= $78,502,050
If there is no surplus then the PV of liabilities must equal the PV of assets, i.e.
PV of liabilities = $78,502.050
= 79,617,693 - 79,923,629
= 9,264,600
assets = 79,617,693
= 8.536692
Interest surplus = Actual interest - expected interest based on actual cash flows
= S(i', i2', d1', d2', f', f1') - S(i, i2, d1', d2', f', f1')
= 6571000 - [0.07 * 82404000 - .035 * (300-7) * 31000 * 1.02 *1.01]
= $1,130,225.73
= -923900.88
Check : inflation was higher than expected, which causes an increase in the payments
and in the end of year liabilities, leading to a deficiency
= -512,261.12
You are asked to analyse the experience of this portfolio over the 2 year period to 31
December 2005.
The liabilities at 1 January 2004 were calculated on a set of assumptions (the old basis).
The assumptions on the old basis are:
Investment earnings 8% pa
Inflation of annuity payments 4% pa
3 deaths in each calendar year 2004 and 2005
On this basis the liability at 1 January 2004 is 100 x $10,000 x 11.394 which is $11,394,000.
The company held $12,000,000 of assets in the annuity fund at 1 January 2004 to provide a
margin for safety.
(a) Show that on the old basis assumptions the initial liability of $11,394,000 should
be just sufficient to meet the annuity payments over the two years and set up the
liability at the end of that period. [3 marks]
(b) Allowing for the initial assets of $12 million, show that the expected surplus at 31
December 2005 on the old basis is $706,848. [1 mark]
When you review the past experience of the portfolio and other industry statistics you decide
that your assumptions (old basis) are no longer realistic and need to be strengthened. On the
new basis the value of an annuity of $1 pa at 1 January is 11.25 for a 65 year old male.
(c) Calculate the actual surplus (or deficiency) at 31 December 2005 after allowing
for setting up the liability on the new basis. [1 mark]
(d) Analyse this actual surplus (or deficiency) into the components of change of basis,
investment earnings, inflation and mortality in that order. [7 marks]
2006 Exam Question 6 -ANALYSIS OF SURPLUS Model Answer
(b) Use the formula to calculate expected surplus (based on expected experience for
investment income, inflation, and deaths) and actual surplus (based on actual experience for
investment income, inflation, and deaths)
Expected Surplus
= A0 * (1+I)^2 A * (100 D1) * (1+f) * (1+I)
- A * 12.25 * (100 D1 D2) * (1+f)^2
= 706,848
Actual Surplus
= A0 * (1+I)^2 A * (100 D1) * (1+f) * (1+I)
- A * 12.25 * (100 D1 D2) * (1+f)^2
= 182,558
Deficiency
= 706,848 182,558
= 524,290
(c) Part of the difference between expected and actual surplus is caused by aa change in the
valuation basis at time t = 2. We want to analyse the surplus assuming that there had not been
any change in basis. Then the surplus caused by the change in basis is considered to be aa
separate item in the analysis.
= 269,674
= - 254,616
Expected surplus = f ( i , f , d )
= -247,906
= 249,048
Mortality Surplus =
= -270,816
Check: for each item of experience, determine whether the sign is as expected. For example,
if investment experience is better than expected, the investment experience item should be
positive. If inflation is higher than expected, the inflation experience component should be
negative.
Check: Make sure that all components, when added together, match the difference between
actual and expected surplus.
- 254,616 247,906 + 249,048 270,816 = - 524,290 OK
Note that some students analysed the surplus using a different order of analysis, and hence
the answers were different. We allowed for these variations in the model solution.