Defined benefits presentation 1


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Defined benefits presentation 1

  1. 1. Group One
  2. 2.  The Defined Benefit (DB) Plan is a pension plan whose retirement promise is framed according to benefits to be paid to participants. Its features are:  They are promises made by a plan sponsor that generate a future financial obligation.  The nature and behaviour of the liability is uncertain.
  3. 3.  Funded status: The difference between the present values of the pension plan’s assets and liabilities.  Plan Surplus : The value of plans assets at market value minus the present value of plan liabilities  Accumulated Benefit Obligation (ABO):to the total present value of pension liabilities to date, assuming no further accumulation of benefits  Projected benefit obligation (PBO): The pension benefits due to participants if the plan is terminated plus projections of future employee compensation increases. (ABO + future employee compensation increases)
  4. 4.  Total future liability: A measure of pension liability that takes into account compensation changes, changes in the workforce and benefit changes associated with inflation.  Retired lives: Otherwise known as retired lives is the number of plan participants currently receiving benefits from the plan.  Active lives: The number of employed participants currently who are currently not receiving pension benefits.
  5. 5.  Plan Status  Sponsor financial status and profitability  Sponsor and Pension fund common risk exposure  Plan features  Workforce characteristics
  6. 6.  A DB pension plan’s broad return objective is to achieve returns that adequately fund its pension liabilities on an inflation-adjusted basis  The pension fund’s stated return desire may be higher than its return requirements, in some cases reflecting concerns about future pension contributions or pension income:
  7. 7.  Tax concerns  Legal and regulatory concerns  Unique Circumstances  Time Horizon  Going concern or termination  Active lives proportion and workforce age  Liquidity Requirement  Number of retirees  Size of contribution  Plan features
  8. 8.  The plans can be large with the potential to affect the sponsoring company's financial health. The company needs to consider two factors.  Managing pension investments in relation to operating investment  Coordinating pension investments with pension liabilities.
  9. 9. Advisor (Alexander Forbes) Custodian Fund Manager
  10. 10.  Key Features of the Scheme Benefit Design  The pension payments increase at 3% per annum and there is a provision for additional discretionary pension increases with the approval of the scheme sponsoring employer.  Deferred pensioners are entitled to a deferred pension payable from their normal retirement age or after the age of 50. They are revalued at 4% per annum and increases to deferred pensions once in payment at 3% per annum.  The sponsor continues to underwrite the scheme and is responsible for any funding strains that may emerge in the future.
  11. 11. Primary Objective • “To disburse pension payments to pensioners and deferred pensioners to dependants on the death of a pensioner, with the pensions payments increasing at 3% per annum and with a provision for additional discretionary pension increases with the approval of the Scheme sponsoring employer" Funding Ojective • “To ensure that the Scheme remains in a fully funded position and that the probability of a call upon the Scheme Sponsor to provide additional funding can be minimized”
  12. 12. InvestmentObjective •i) To achieve a net return on the Scheme assets (net of investment expenses) over the long term at least equal to the valuation rate of interest/discount rate of 10% per annum assumed for the purposes of the actuarial valuation of the Scheme; •ii) To seek to improve this absolute return objective by seeking to structure immunized portfolios through matching bond portfolios; •iii) To do this in a way which minimizes the possibility of a call on the Scheme Sponsor for additional funding. ReturnObjective •i) To achieve a total rate of return of at least 10% per annum, net of investment costs over three year rolling periods; and •ii) To outperform the agreed investment return benchmarks over three year rolling periods.
  13. 13. The Board views risk primarily as the likelihood that the chosen strategy will result in the objectives not being met. However they exhibited below average willingness to take risk because they mainly preferred fixed income investments and developed a defensive and conservative strategy to manage their portfolio. The scheme registered a total asset value of Ksh 10553.4 million giving the scheme an average ability to take risk given the number of pensioners and the type of pensions they are obliged to pay. Generally, we assume they have average risk tolerance.
  14. 14. Constraint Features Legal and Regulatory RBA Time Horizon Not a going concern, Closed DB Multistage Liquidity Requirements No current liquidity requirements Changes in the pension amounts in future Tax concerns Tax exempt Unique circumstances 11,313 Dependants Investment constraints
  15. 15. Asset class Tactical Allocation Range (%) RBA Max% Cash & demand deposits 5 5 Fixed and time deposits 5-10 30 Term notes(commercial paper, corporate bonds , loan stocks) 0-10 30 Government of Kenya securities 40-70 70 Quoted domestic Equities 0-15 70 Offshore bond investments 0-5 15 Immovable property 0-25 30
  16. 16.  For easier and proper monitoring and evaluation process, the following sections were narrowed into:  Investment manager performance review  Strategy (annual) review  In-depth strategy (triennial) review
  17. 17.  The Kenyan government wants to shift from the DB to the DC plan.  Civil servants to start paying for retirement dues…………… Civil servants will contribute 2% of their salary in their first year to the retirement scheme and then 5% and 7.5% in the second and third years onwards respectively. In addition the government will have a life insurance policy with at least five times the member’s annual pensionable emoluments.
  18. 18. Mr oduor Underwriter Geminia Mr Njeru Actuary Alexander Mr Kala Fund Manager ICEA Mr James Fund Manager UAP Mrs Nguyo Consultant Alexander Forbes