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Another Pensions Question

0 votes
asked Oct 14 in BUS 3024S - Contingencies by Faith (400 points)

When answering pension questions(in general) that require us to calculate the emerging costs , why do we multiply by a half for some decrements (like sickness) but not others (like death) assuming both occur half yearly

1 Answer

+1 vote
answered Oct 15 by MarioGiuricich (1,350 points)
edited Oct 15 by MarioGiuricich

For decrements such as early retirement and ill-health retirement, we usually assume that they occur half-way through the year of age.

Now, we are looking at projecting the emerging cost during that particular year of age, and because the member is (in the case of ill-health or early retirement) leaving half-way through, only half of that year's worth of benefit is to be paid (in respect of that year of age). Hence why we multiply by a half i.e. benefit is to be paid from decrement to end of year of age.

For the decrement of age retirement, which is assumed to happen at age 65 exact (and NOT half-way through the year of age 64 to 65), a full-year's worth of service is "experienced" by the member, so there is no need to multiply by a half.

Hope this helps.