1. Actuarial and Benefits Consulting Jonathan Mowbray CARES
1 December 2003
Aon Consulting Limited is regulated by the
Personal Investment Authority for investment business

2. Why Money Purchase fails
Members take all the risk
Transience
No pooling of investment risk
Members cannot afford the risk
Safer investments
Lower benefits for same cost

3. Ancient History Preservation / 5 year vesting 1975
GMP / Requisite Benefits 1978
GMP revaluation 1978
Anti-franking 1985
Pension revaluation 1986

4. Modern History 2 year vesting 1988 GMP increases 1988
Debt on employer 1991
Pension revaluation again 1991
LPI / wind-up / surplus 1992
LPI 1997
MFR / debt on employer 1997
Wind-up / debt on employer again 2003

5. What’s gone wrong?
Targeted, minimum ongoing and guaranteed discontinuance benefits
Only difference is real salary growth
To pay lower than target benefits must break final salary link

6. Why Final Salary fails Company takes the whole of the risk
Cost has progressively increased
Increased contribution volatility risk
FAS, FRS & IAS liabilities
Loss of investment freedom

7. What do companies want? Value for money Stable contributions
Guaranteed benefits for members
Staff retention
Low risk

8. CARE Schemes
Career
Average
Revalued
Earnings
Schemes

9. CARE Schemes Example - Each year member earns:
Salary ¸ 60 as a pension
Each year pension earned to date is increased by the Trustees
Increase guaranteed to be at least RPI
More if investment returns etc allow it

10. CARE Schemes
The vital issue is the reintroduction of discretionary benefits
Guaranteed benefit increases in line with RPI
Target benefit increases in line with national average earnings etc
Difference between target and guaranteed allows funding flexibility

11. Not just a cheaper option
If switch from Final Salary to CARES to reduce cost, potentially increasing risk
Targeted, minimum ongoing and guaranteed discontinuance benefits

12. Risk - Advantages Risk is shared
Members receive a guaranteed benefit, more if affordable
Company cost is relatively stable
Benefits relatively easily understood

13. Funding Flexibility
The vital issue is the reintroduction of discretionary benefits
Guaranteed ongoing benefit increases in line with RPI
Target benefit increases in line with national average earnings etc
Difference between target and guaranteed allows funding flexibility

14. What CARES offers members
A benefit which is guaranteed to be adequate
A possibility of a larger benefit if affordable
Ability to plan retirement as benefit becomes more certain over time

15. CARES - For the Company Predictable cost
Removal / reduction of FRS deficit
Flexibility in sharing risk with members
Pooled investments
DB - so more saleable to workforce
Golden handcuff aids retention
No reduction to benefits???

16. Why CARES can work Discretionary benefits
Target benefit is around 30% larger than guaranteed benefit at revaluation of 2% pa above RPI
Similar effect to discretionary increases in payment

17. Is now the right time?
Many companies moving to DC – alternative may be discontinuance
Possibly no reduction to benefits?
If remain with Final Salary…
Assets fall - problems worsen
Assets rise - problems disappear

18. Reasons given Reduction of accrued liabilities to minimum guaranteed
Cost containment
Risk management
Middle way

19. Some issues Past service conversion? Same or separate Trust?
Contributions and bonus policy
Valuations & bases

20. Contributions / bonus policy
Company funds for target benefits & bonus paid in line with target unless unaffordable
Co pays flat rate unless outside limits - bonuses paid on funding level between target and guarantee
Fluctuations shared equally

21. Alternatives - Hybrids
5 main types:
Underpin schemes
Split benefits
Top up schemes
DC feeder to DB
Cash balance plans