Where it is the responsibility of the actuary, he or she uses appropriate methodology and assumptions to determine the conversion factors of lump sums to income. Unless these factors are set so as to meet specific policy objectives, they are determined as cost-neutral. If the factors are not cost-neutral, the actuary discloses this fully and determines and reports on the implications on adequacy and sustainability of the scheme.
The rate of conversion of lump sums into annuities is an important element of provident fund, notional defined contribution and funded defined contribution schemes. In a provident fund or funded defined contribution system, a lump sum based on the account balance of the scheme member at the time of retirement may be paid. In such situations, the post-retirement risks, namely investment and longevity risks, are fully borne by individual scheme members. When a provident fund or funded defined contribution system converts individual accounts to guaranteed income streams, the fund bears the longevity and investment risk. In a notional defined contribution scheme, the conversion of the value of the account is usually governed by the scheme’s rules and also has significant implications for sustainability and adequacy of benefits.
This guideline should be read in conjunction with Guideline 15 and with reference to Part E.