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Tutorial 2 (Pension Mathematics)

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16 views

Tutorial 2 (Pension Mathematics)

Uploaded by

Desmond Lean
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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AQ099-3-3-PNP Pension Mathematics

Salary Scale Table

𝑥 𝑠𝑥 𝑥 𝑠𝑥 𝑥 𝑠𝑥 𝑥 𝑠𝑥
30 1.00 40 1.85 50 3.41 60 6.21
31 1.06 41 1.96 51 3.63 61 6.56
32 1.13 42 2.09 52 3.86 62 6.93
33 1.20 43 2.22 53 4.10 63 7.31
34 1.28 44 2.36 54 4.35 64 7.70
35 1.36 45 2.51 55 4.62 65 8.08
36 1.44 46 2.67 56 4.91 66 8.48
37 1.54 47 2.84 57 5.21 67 8.91
38 1.63 48 3.02 58 5.53 68 9.35
39 1.74 49 3.21 59 5.86 69 9.82

1. Assume the salary scale given above, and a valuation date of 1 September. A plan
member aged 50.5 at valuation received RM6,000 in salary in the month to the
valuation date. Salary increases take place on 1 January every year.
Compute the member’s expected target pension benefit per year. Assume the retirement
age is 65 and the replacement ratio is 65%.

2. Employees at XYZ company have pay reviews on their birthdays and retire on their
60th birthdays. Using the salary scale table above, estimate the total earnings in the year
before retirement of an employee now aged exactly 40 who was paid a total of $15,000
last year.

3. Employees at ABC company have a pay review on 1 January each year and retire on
their 60th birthdays. Using the salary scale table above, estimate the total earnings in
the year before retirement of an employee aged exactly 40 on 1 October who is paid an
annual rate of salary of $15,000 on that date.

4. An employee enters a company at age 35, with a starting salary of 55,000. The salary
function follows the salary scale above.
A defined benefit pension plan guarantees an annual retirement benefit of 3% of final
3-year average salary at normal retirement age 60 for each year of service.
a) Calculate the projected annual retirement income if the employee retires at age 60
exact.
b) Calculate the replacement ratio provided by the pension.

5. For a defined contribution plan, the contribution rate is set using the following
assumptions:
 Contributions are deposited into the member’s account monthly in arrears at a
fixed percentage of 10% of the salary rate at that time.
 Contributions earn investment returns of 10% effective per year.
 The salary scale is given by 𝑠𝑥 = 1.05𝑥 for 24 ≤ 𝑥 ≤ 60 and salaries are
assumed to increase continuously.
Consider an employee, Boromir currently age 25. Contributions start this month. The
current salary rate is RM50,000 per year. Boromir plans to retire at age 60. Upon
retirement, he would use the proceeds to buy a life annuity immediate payable monthly.
a) Calculate the value of the projected fund at retirement.

Level 3 Asia Pacific University of Technology & Innovation Page 1 of 2


AQ099-3-3-PNP Pension Mathematics

(12)
b) Suppose that under an appropriate mortality and interest rate assumption, 𝑎̈ 60 =
14.44. Calculate the replacement ratio of Boromir.

Level 3 Asia Pacific University of Technology & Innovation Page 2 of 2

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