Post on 13-Jan-2015
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DEFINED BENEFIT PENSION PLANS
Group One
What is a DB Plan?
The Defined Benefit (DB) Plan is a pension plan whose retirement promise is framed according to benefits to be paid to participants. Its features are:
They are promises made by a plan sponsor that generate a future financial obligation.
The nature and behaviour of the liability is uncertain.
General Pension Definitions
Funded status: The difference between the present values of the pension plan’s assets and liabilities.
Plan Surplus : The value of plans assets at market value minus the present value of plan liabilities
Accumulated Benefit Obligation (ABO):to the total present value of pension liabilities to date, assuming no further accumulation of benefits
Projected benefit obligation (PBO): The pension benefits due to participants if the plan is terminated plus projections of future employee compensation increases. (ABO + future employee compensation increases)
General Pension Definitions
Total future liability: A measure of pension liability that takes into account compensation changes, changes in the workforce and benefit changes associated with inflation.
Retired lives: Otherwise known as retired lives is the number of plan participants currently receiving benefits from the plan.
Active lives: The number of employed participants currently who are currently not receiving pension benefits.
Factors affecting Risk Tolerance and Objectives
Plan Status Sponsor financial status and profitability Sponsor and Pension fund common risk
exposure Plan features Workforce characteristics
Return Objectives
A DB pension plan’s broad return objective is to achieve returns that adequately fund its pension liabilities on an inflation-adjusted basis
The pension fund’s stated return desire may be higher than its return requirements, in some cases reflecting concerns about future pension contributions or pension income:
Constraints
Tax concerns Legal and regulatory concerns Unique Circumstances Time Horizon
Going concern or termination Active lives proportion and workforce age
Liquidity Requirement Number of retirees Size of contribution Plan features
Evaluating the risk management considerations
The plans can be large with the potential to affect the sponsoring company's financial health. The company needs to consider two factors. Managing pension investments in
relation to operating investment Coordinating pension investments with
pension liabilities.
Parties involved during investment
Advisor(Alexander
Forbes)
CustodianFund Manager
JKL PENSION SCHEME
Key Features of the Scheme Benefit Design The pension payments increase at 3% per annum
and there is a provision for additional discretionary pension increases with the approval of the scheme sponsoring employer.
Deferred pensioners are entitled to a deferred pension payable from their normal retirement age or after the age of 50. They are revalued at 4% per annum and increases to deferred pensions once in payment at 3% per annum.
The sponsor continues to underwrite the scheme and is responsible for any funding strains that may emerge in the future.
Return Objective
Primary Objective
• “To disburse pension payments to pensioners and deferred pensioners to dependants on the death of a pensioner, with the pensions payments increasing at 3% per annum and with a provision for additional discretionary pension increases with the approval of the Scheme sponsoring employer"
Funding Ojective
• “To ensure that the Scheme remains in a fully funded position and that the probability of a call upon the Scheme Sponsor to provide additional funding can be minimized”
Return ObjectiveIn
vest
men
t O
bje
ctiv
e • i) To achieve a net return on the Scheme assets (net of investment expenses) over the long term at least equal to the valuation rate of interest/discount rate of 10% per annum assumed for the purposes of the actuarial valuation of the Scheme;
• ii) To seek to improve this absolute return objective by seeking to structure immunized portfolios through matching bond portfolios;
• iii) To do this in a way which minimizes the possibility of a call on the Scheme Sponsor for additional funding. R
etu
rn O
bje
ctiv
e • i) To achieve a total rate of return of at least 10% per annum, net of investment costs over three year rolling periods; and
• ii) To outperform the agreed investment return benchmarks over three year rolling periods.
Risk Tolerance
The Board views risk primarily as the likelihood that the chosen strategy will result in the objectives not being met. However they exhibited below average willingness to take risk because they mainly preferred fixed income investments and developed a defensive and conservative strategy to manage their portfolio. The scheme registered a total asset value of Ksh 10553.4 million giving the scheme an average ability to take risk given the number of pensioners and the type of pensions they are obliged to pay.Generally, we assume they have average risk tolerance.
Constraints
Constraint Features
Legal and Regulatory RBA
Time Horizon Not a going concern, Closed DBMultistage
Liquidity Requirements No current liquidity requirementsChanges in the pension amounts in future
Tax concerns Tax exempt
Unique circumstances 11,313 DependantsInvestment constraints
Strategic Asset allocation: ALM Approach
Asset class Tactical AllocationRange (%)
RBA Max%
Cash & demand deposits 5 5
Fixed and time deposits 5-10 30
Term notes(commercial paper, corporate bonds , loan stocks)
0-10 30
Government of Kenya securities 40-70 70
Quoted domestic Equities 0-15 70
Offshore bond investments 0-5 15
Immovable property 0-25 30
Monitoring and Evaluation
For easier and proper monitoring and evaluation process, the following sections were narrowed into: Investment manager performance review Strategy (annual) review In-depth strategy (triennial) review
POSSIBLE DEATH OF DB PLAN
The Kenyan government wants to shift from the DB to the DC plan.
Civil servants to start paying for retirement dues……………
Civil servants will contribute 2% of their salary in their first year to the retirement
scheme and then 5% and 7.5% in the second and third years onwards
respectively. In addition the government will have a life insurance policy with at least five times the member’s annual
pensionable emoluments.
Thank you Industrial Mentors
Mr oduorUnderwriter
Geminia
Mr NjeruActuary
Alexander
Mr KalaFund Manager
ICEA
Mr JamesFund Manager
UAP
Mrs NguyoConsultantAlexander
Forbes