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Explanation of 2020 member benefit statements

Mar 5, 2021

Introduction 

There have been a number of queries raised by members following the 2020 benefit statements. In particular members have queried the change in withdrawal benefit which in most cases may have decreased over the past year when compared to their 2019 benefit statements. 

The withdrawal benefit is determined as the higher of the Resignation Benefit as per the Fund rules and the Minimum Individual Reserve or Minimum Benefit as per the Pension Funds Act. 

Resignation benefits as per the Fund rules: 

The resignation benefit, as set out in the Fund rules, is a refund of contributions in line with the following: 

  • the return of member contributions and any additional voluntary contributions plus 1/25th of a percent interest for every completed year of service; plus 
  • a percentage of the employer’s contributions based on a sliding scale dependent on your years of service, less an allowance for Fund expenses, plus 1/25th of a percent interest for every completed year of service. 

Minimum Benefits 

At the benefit statement date, you will have already accrued a portion of your pension (i.e. your “accrued pension”) which depends on your years of service, the accrual rate applicable to each year of service as per the rules and your final average salary. 

The Minimum Benefit is best described as the amount of money that would need to be invested by the Fund at the benefit statement date so that, by the time you reach your normal retirement date, the investment would be sufficient to provide you this accrued pension promised in terms of the Fund’s rules. 

In calculating the minimum benefit, the Fund would need to make an assumption as to the value of your future pension payments and would need an assumption in respect of the investment returns that would be earned between the benefit statement date and your normal retirement date. 

The investment returns that would be earned between the benefit statement date and your normal retirement age are assumed to be the yields on a portfolio of government bonds (i.e. “risk-free” returns). This assumption is specified by the Financial Sector Conduct Authority and the assumption is updated and published monthly. 

The assumptions needed to determine the value of your future pension payments after retirement are determined by the Fund’s actuary and take into account assumptions for expected lifetime and well as expected investment returns after your retirement date. These assumptions are used to determine the capitalisation factor at normal retirement age. The capitalisation factor simplistically converts your annual pension into a lump sum that would be sufficient to provide for your annual pension payable for the remainder of your lifetime. 

Reason for decrease in withdrawal benefits from 2019 to 2020 

From 2019 to 2020, your Fund resignation benefit in line with the Fund rules would have increased in line with your additional contributions. In addition, because you would have an additional year of service, more interest would be applied to those contributions. 

Similarly, from 2019 to 2020 your accrued pension may have increased because of an additional year of service. 

However, from 2019 to 2020 the expected investment returns on government bonds increased meaning that, in 2020, investors require more interest when they lend money to government. In other words, it means that investments in government bonds will be expected to earn more interest in the future. This in turn means that the amount of money that should be invested now to purchase your accrued pension at normal retirement date (i.e. the Minimum Benefit) is lower. You need less money now to afford the same future benefit because you are expected to earn higher investment returns into the future. It is important to note that your accrued pension is not affected by these assumptions, but the Fund requires a smaller investment now in order to buy that accrued pension at normal retirement date.

The withdrawal benefit quoted in your benefit statement is always the greater of the above two calculations.

The change in the key assumptions over the period between benefit statements is as follows:

  2019 2020
Pre-retirement discount rate per FSCA 3.35% 4.88%
Minimum benefit capitalisation factor 12.608 9.294

The increase in the discount rate as noted above would result in a reduction in the minimum benefit of approximately 25% for a member who was 20 years from their retirement date. The longer the period to retirement the greater the impact. 

Likewise, the reduction in the assumed investment returns would also reduce the capitalisation factor implying a reduction in the lump sum that would be needed at your retirement date to secure the same level of annual pension. 

The combined effect of these significant changes is a significant reduction in the minimum benefit. IN many cases this would imply that the resignation benefit in terms of the Fund rules would now be greater and as such would be the value noted on your benefit statements. 

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