Pensions presentation

Presented byAdrian AllottSenior Consultant

May 27, 2010

2 April 21, 2023

Cost of Guarantee

“How much expense does an administrator need to incur to ensure that it is able to meet all of its promises to its clients?”

In pillar II pensions this cost is the sum of:

– Losses due to the enforcement of the “return of net contributions guarantee” on all forms of discontinuance

– Losses due to the enforcement of the “market relative return guarantee” on returns

– Losses due to the crystallisation of operational risks (e.g. fraud, system breakdowns, natural disasters)

3 April 21, 2023

Product design

Initial investment 1000

Term of investment 60 months

Investment return market-linked

Investment guarantees return in a month will be no less than inflation + 0.1%

proceeds on surrender or maturity will be no less than initial investment

Surrender value accumulated initial investment, after guarantees

surrenders occur automatically when guaranteed values exceed asset values for the first time

Maturity value accumulated initial investment, after guarantees

No deaths, disablements

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AssumptionsProjection months 60

Discount Rate 0.50% per month

Equity Proportion 50%

Equity Return Process Mean Monthly Return Std Dev

Normal Distribution 0.75% 0.50%

Cash Return Process Mean Monthly Return Monthly Reversion

Mean reversion 0.50% 10%

Random Element ProcessMean Monthly

Movement Std Dev

Normal Distribution 0.00% 0.05%

Inflation Process Mean Monthly Increase Monthly Reversion

Mean reversion 0.30% 10%

Random Element ProcessMean Monthly

Movement Std Dev

Normal Distribution 0.00% 0.05%

April 21, 2023

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Results

Run FV AssetsFV Guar.

Acct. ValueTermination

Month Guarantee?PV

Guarantee

1 1003.71 1004.71 60 1.00 0.74

2 1398.61 1296.35 60 0.00 0.00

3 1017.96 1018.55 5 0.58 0.57

4 1534.54 1285.45 60 0.00 0.00

5 1002.38 1003.49 1 1.11 1.11

6 1004.41 1005.19 1 0.79 0.78

7 1500.17 1272.32 60 0.00 0.00

8 1003.89 1003.98 1 0.09 0.09

9 1504.40 1282.64 60 0.00 0.00

10 1477.27 1231.37 60 0.00 0.00

April 21, 2023

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Histogram Bin Frequency Cumulative %0 740 74.0%

0.5 60 80.0%1 69 86.9%

1.5 39 90.8%2 36 94.4%

2.5 24 96.8%3 12 98.0%

3.5 8 98.8%4 3 99.1%

4.5 2 99.3%5 3 99.6%

5.5 0 99.6%6 2 99.8%

6.5 1 99.9%7 0 99.9%

7.5 0 99.9%8 1 100.0%

April 21, 2023

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Histogram

April 21, 2023

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Calculation

Capital at 99.5% level to cover investment guarantees 0.50% of assets pa

Capital required to cover operational risk 0.15%of assets pa

(for example)

Total capital required 0.65% of assets pa

Shareholder required return on capital 15%pa

(for example)

Cost of capital 0.10% of assets pa

April 21, 2023

9 April 21, 2023

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