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Provisions (Why a provider calculates provisions
(BAD MEDICS) (Benefit…
Provisions
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Factors to consider when valuing liabilities to set contributions for a DB scheme, from the sponsor's perspective
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Cautious if better investment returns can be earned within the scheme leading to lower long-term costs
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Factors to consider when valuing the liabilities for a transfer of liabilities between two providers
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A best estimate basis is fair, and the need to agree may result in a best estimate basis being used.
However, the basis used will depend on the relative bargaining power of both sides and the relative supply and demand for liability transfers.
It is possible that the two sides agree that the transfer should not reflect a best estimate of future costs, for example if they recognise a need to hold a margin to protect the security of the benefits.
Bases
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Best estimate basis
Set of assumptions that have equal probability of overstating or understating the value of assets and the liabilities
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Basis to use when valuing liabilities for determining whether discretionary benefits can be awarded or benefit improvements made
The provider may want to use assumptions that do not overestimate the surplus available in order to avoid being pressurised into distributing it as discretionary or additional benefits. Similarly proposed benefit improvements should not be undervalued.
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The most realistic indication will be based on best estimate assumptions, but a cautious basis (or range of assumptions) may be used.
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Factors to consider when valuing liabilities to set contributions for a DB scheme, from the trustees and members' perspectives
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But not so cautious that the sponsor believes the cost of benefits to be excessive and hence reduces future benefits, closed the scheme to future accrual, or pays a high contribution rate and becomes insolvent
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Provisions
The calculated amounts that need to be set aside to meet a provider's future liabilities. The value of the provisions will depend on the assumptions used to value the future expected cashflows.
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