IFoA SP4 cheat sheet

Defined benefit (DB): benefit is a formula, typically accrual rate × pensionable service × pensionable salary (final salary or CARE). Employer bears investment and longevity risk.

Defined contribution (DC): benefit equals accumulated contributions plus investment return, converted to income at retirement; member bears investment and longevity risk (subject to any guaranteed annuity options).

Career average revalued earnings (CARE): each year's pension credit = accrual rate × that year's pensionable earnings, then revalued by a prescribed index (e.g. CPI) up to retirement or exit.

Final salary: pension = accrual rate (e.g. 1/60, 1/80) × service × reference salary; reference salary may be final year, best-of-last-three, or average of last N years.

Hybrid designs: cash balance (defined lump sum with guaranteed interest credit), collective DC (CDC, pooled risk with adjustable benefits), and DB core plus DC top-up.

Scheme type taxonomy: occupational vs personal pension; funded vs unfunded (pay-as-you-go); insured vs self-administered; trust-based vs contract-based.

Key benefit features to identify: lump sum at retirement, spouse/partner's pension, children's allowances, ill-health early retirement, death-in-service lump sum, escalation (CPI/RPI/fixed) and caps.

Benefit change levers: closing to new members, closing future accrual, reducing accrual rate, changing revaluation or escalation index, capping pensionable salary increases, raising member contribution rates.

Funding objective: hold assets sufficient to meet benefits as they fall due; funding target is set in the scheme's Statement of Funding Principles against a technical provisions basis.

Technical provisions (TP) = present value of future benefits minus present value of future contributions, calculated on a scheme-specific basis agreed between trustee and employer (in UK, under Part 3 Pensions Act 2004).

Accrued benefits valuation: split liabilities into past service (accrued) and future service; past service deficit is repaired via a recovery plan with a schedule of contributions.

Actuarial assumptions: financial (discount rate, inflation, salary growth, pension increases) and demographic (mortality, withdrawal, retirement age, commutation, family status).

Discount rate choice: typically derived from expected return on assets or a bond-based rate plus a margin; higher discount rate reduces liabilities, so assumption-setting is a key governance control.

Contribution structure: normal cost (cost of one year's accrual) plus deficit amortisation; employer may hold a contingent asset (parent guarantee, escrow, letter of credit) as security.

Funding measures: funding level = assets / liabilities; also monitor shortfall, recovery plan length, and scheme funding relative to a low-dependency (gilt) basis.

Financing routes: employer contributions, member contributions, investment return, and risk-transfer mechanisms such as buy-ins, buy-outs, longevity swaps and scheme mergers.

LDI principle: match liability cash flows and interest/inflation sensitivity with assets; measure interest rate and inflation hedge ratios on a consistent basis (e.g. liability-driven benchmark).

Asset classes: equities (growth, volatility), bonds (fixed interest, index-linked), property, infrastructure, private credit, absolute return, and derivatives (swaps, futures, options) for hedging and efficient exposure.

Duration matching: liability duration ≈ weighted average term of benefit payments; a bond portfolio's duration and convexity should be compared with liability interest-rate sensitivity.

Surplus risk framework: quantify funding-level volatility from equity, credit, interest rate and inflation exposures; set risk budget and trigger points (de-risking ladders).

DC default design: target-date or lifestyling glidepath reduces growth assets near retirement; consider member risk tolerance, pot size, and decumulation pathway.

Diversification and correlation: assets with low correlation to growth risk improve efficiency; stress-test correlations rising in a crisis (diversification failure).

Governance documents: Statement of Investment Principles (SIP) sets objectives, asset allocation ranges, ESG and stewardship policy; implementation via investment management agreements.

Performance measurement: compare return against a strategic benchmark, attribute return to asset allocation vs stock selection, and monitor fees and transaction costs.

Risk taxonomy: investment (market, credit, liquidity), longevity, inflation, interest rate, sponsor covenant, operational, regulatory, and member behaviour risk.

Covenant assessment: employer's ability and willingness to fund; review financial strength, sector outlook, contingent assets, and support within the employer group.

Integrated risk management: combine covenant, funding and investment risks into a single framework with agreed risk appetite, monitoring metrics and escalation triggers.

Governance bodies: trustee board, sub-committees (audit, investment, risk), scheme manager, scheme actuary, auditor, and (in UK) the Pensions Regulator with codes of practice.

Key controls: conflicts of interest policy, trustee knowledge and understanding (TKU) requirements, internal dispute resolution procedure, and breach reporting.

Regulatory capital/security: Pension Protection Fund (UK) or equivalent compensation scheme; levy based on insolvency risk and funding level.

Scheme-specific documents: trust deed and rules, statement of funding principles, schedule of contributions, SIP, and annual benefit statements.

Risk register practice: identify, assess likelihood and impact, assign owner, record mitigating controls, and review at each trustee meeting.

IAS 19 / FRS 102 s.28 approach: measure defined benefit obligation (DBO) using the projected unit credit method at each reporting date.

Discount rate under IAS 19: market yield on high-quality corporate bonds (AA-rated) with terms matching the benefit payment profile; not the scheme's expected asset return.

Service cost and net interest: current service cost in profit or loss; net interest = discount rate × net DB liability (or asset); remeasurements (actuarial gains/losses, asset returns above discount rate) go to OCI.

Balance sheet recognition: present value of DBO less fair value of plan assets, adjusted for asset ceiling (IAS 19) or FRS 102 restrictions; a surplus is recognised only if recoverable.

Disclosure requirements: reconciliation of DBO and plan assets, principal actuarial assumptions, sensitivity analysis, maturity profile, and expected contributions for next period.

DC accounting: expense equals contributions payable; no balance sheet liability beyond unpaid contributions.

Multi-employer and state schemes: account for as DC if insufficient information to identify the share of obligation; disclose the arrangement and any deficit funding obligation.

Actuarial vs accounting figures differ: accounting uses prescribed assumptions and discount rate; funding valuation uses scheme-specific assumptions agreed with the employer.

State pension design (UK example): flat-rate new State Pension built from qualifying years of National Insurance contributions; contracted-out and pre-2016 additional state pension affect the starting amount.

Triple lock concept: state pension increases by the highest of earnings growth, price inflation (CPI) and a fixed minimum percentage.

Individual provision: personal pensions, stakeholder pensions, SIPPs, and workplace DC; tax relief on contributions subject to annual and lifetime allowance rules (where applicable).

Decumulation options: annuity purchase (lifetime, level or escalating, single or joint life, with guarantees), income drawdown (flexi-access), uncrystallised funds pension lump sum, and trivial commutation.

Annuity pricing drivers: interest rates, mortality/longevity assumptions, expense loadings, and any guarantees; rates fall when yields fall and improve with age or impaired health.

Drawdown risks: investment risk, longevity risk, sequence-of-returns risk, withdrawal-rate sustainability, and tax treatment of withdrawals.

Retirement advice considerations: capacity for loss, health and dependants, other income, tax position, and the difference between guidance and regulated advice.

At-retirement journey: default pathways (e.g. CDC or collective solutions), wake-up packs, and requiring members to make an active choice.

Benefit change process: check the trust deed's amendment power, any statutory protection (e.g. section 67 in the UK), member consultation requirements, and accrued-rights protection.

Restructuring options: scheme merger, DB to DC conversion, partial buy-out, and transfer of liabilities to an insurer or consolidator.

Wind-up stages: trustee resolution to wind up, notify members and regulators, secure benefits (buy-out policies or transfers), settle liabilities, and appoint a final actuarial report.

Priority order on wind-up: statutory priority orders determine how limited assets are allocated, often favouring pensioner and accrued rights over future increases.

Buy-in vs buy-out: buy-in is an insurance policy held by the trustee as a scheme asset; buy-out transfers liabilities and assets to an insurer, ending scheme responsibility.

Enhanced transfer value exercises: must be fair, member-focused, and subject to advice; regulators scrutinise incentives to transfer out of DB.

Employer debt on exit: calculate the employer's share of the deficit on a prescribed basis (e.g. section 75 debt in the UK) when an employer leaves a multi-employer scheme.

Communication duties: clear, timely member communications on changes, options, and wind-up progress, including annual benefit statements.

Actuarial Profession Standards (APS) and Technical Actuarial Standards (TAS) govern how actuarial work is documented, reviewed and communicated; TAS 100 covers principles for technical actuarial work.

Actuaries' Code principles: integrity, competence and care, impartiality, compliance, and speaking up; apply professional judgement and document reasoning.

Conflicts of interest: identify, disclose and manage; a scheme actuary advising trustees must not let employer interests override member interests.

Whistleblowing and breach reporting: report material breaches of law or professional standards to the appropriate regulator or professional body.

Peer review and documentation: significant actuarial judgements should be independently reviewed and the basis recorded so another actuary could reproduce the result.

Communication standards: advice to trustees should be clear, proportionate, and distinguish fact from opinion; explain uncertainty and sensitivity to assumptions.

Data protection and confidentiality: member data handled in line with data protection law; disclose only as required for the purpose and with appropriate security.

Ethical dilemmas in pensions: advising on transfer values, benefit reductions, or employer covenant weakening requires balancing duties to different stakeholders transparently.