A “pay as you go” pension plan

Part A

1. A “pay as you go” pension plan is a specific type of pension scheme where the benefits are directly tied to the contributions or taxes paid by individual participants. While, the “pre-funding” pension plan does not actively paid into by its future beneficiaries.
2. Actuaries analyze the financial costs of risk and uncertainty.

Part A – Short answer (40 marks, 5 marks each)

1. What is the difference between “pay as you go” and “pre-funding” a pension plan?
2. What is the actuary’s role? How is it beneficial that the actuary performs this role for each of the following:
   a. pension plan members?
   b. the plan sponsor (employer)?
3. Are actuaries required for DC plans? Why or why not?
4. In your own words, describe the differences between funding a pension plan on a going-concern/ongoing basis as opposed to funding on a solvency/wind-up basis.
5. Explain what it means when a plan is in a “surplus” or “deficit” position.
6. How is the funded ratio determined in plan valuations?
7. Explain what “economic assumptions” are as used by actuaries, and provide an example.
8. Explain what “social assumptions” are as used by actuaries, and provide an example.

Part B – Application (30 marks)
The questions below are based on the Actuarial Valuation on the Public Service Pension Plan as at December 31, 2011:
https://web.archive.org/web/20150427224210/https://www.pspp.ca/about/publications/valuation_reports/PSPP_Actuarial_Valuation_Report_2011.pdf
Read through the document. Prepare a short answer (from one line to one paragraph maximum should be sufficient to answer each question) for each of the following questions. Answer in your own words, where possible. Support each answer with the relevant page and section numbers from the valuation report.

1. The Executive Summary presents the results of two different valuations.
   a. As of December 31, 2011 for each valuation method, is the plan in deficit or surplus? How do you know? (2 marks)
   b. What is the value of the difference between the results of the 2011 going concern and solvency valuations? (2 marks)
2. Explain how going-concern and solvency valuations can produce different results for the same plan. Include references to the report and the textbook with page numbers to support your answer. (5 marks)
3. The report discusses contribution requirements in Section 4.
   a. From the information provided in the valuation, what does “current service rate” mean? (3 marks)
   b. What is the University’s current service rate? What factors contributed to the change from 2010 to 2011? (3 marks)
4. Name one example of an economic assumption used in the valuation report.
   a. Identify the value of this assumption in both the going concern and solvency valuations (provided in Appendix C and D, respectively). (5 marks)
   b. Briefly summarize the justifications for this assumption in both the going concern and solvency valuations. (5 marks)
   c. Discuss why the value of this assumption is either the same or different for each valuation. (5 marks)

Part C – Critical Thinking (30 marks)
The reading assignment for this unit discussed several reasons for and against pre-funding defined benefit pension plans. This part of the assignment asks you to formulate and defend an opinion on this topic.

Background
Assume you are an employer who has been asked to make a short presentation about pre-funding at a conference. You will be participating in a debate and will need to argue either for or against pre-funding pension plans.