Pensions and other retirement benefits
Domain 7 tests pensions and other retirement benefits: scheme design, funding, regulation and member outcomes.
Core ideas
- DB promises a benefit linked to salary or service; DC provides a pot with investment risk on the member. Hybrid and CDC schemes share risk differently.
- Scheme funding (Part 3 of the Pensions Act 2004) requires a triennial actuarial valuation, technical provisions, a Statement of Funding Principles, a schedule of contributions and, if in deficit, a recovery plan.
- The discount rate must be scheme-specific and appropriate; the employer covenant and TPR's code drive the funding target.
- Buy-ins, buy-outs, CETVs, GMP equalisation, the PPF and section 75 debts all affect member and employer outcomes.
Worked example
A scheme has liabilities of £500m with duration 18 years and assets of £450m with duration 10 years. If yields fall 1%, liabilities rise approximately 18% to £590m and assets only 10% to £495m, so the deficit grows from £50m to £95m. Reasoning: duration approximates the sensitivity. The actuary should then consider the recovery plan, the employer's ability to pay, and whether to change the investment strategy to better match liabilities.
Traps
Assuming one "correct" discount rate; treating the funding deficit as the buy-out deficit; ignoring longevity and expense risk; forgetting DC members bear investment and decumulation risk; assuming a recovery plan cures a deficit without covenant analysis.