DEFINED BENEFIT PENSION PLANS

Group One

What is a DB Plan?

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.

General Pension Definitions

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)

General Pension Definitions

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.

Factors affecting Risk Tolerance and Objectives

Plan Status Sponsor financial status and profitability Sponsor and Pension fund common risk

exposure Plan features Workforce characteristics

Return Objectives

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:

Constraints

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

Evaluating the risk management considerations

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.

Parties involved during investment

Advisor(Alexander

Forbes)

CustodianFund Manager

JKL PENSION SCHEME

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.

Return Objective

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”

Return ObjectiveIn

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e • 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. R

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e • 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.

Risk Tolerance

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.

Constraints

Constraint Features

Legal and Regulatory RBA

Time Horizon Not a going concern, Closed DBMultistage

Liquidity Requirements No current liquidity requirementsChanges in the pension amounts in future

Tax concerns Tax exempt

Unique circumstances 11,313 DependantsInvestment constraints

Strategic Asset allocation: ALM Approach

Asset class Tactical AllocationRange (%)

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

Monitoring and Evaluation

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

POSSIBLE DEATH OF DB PLAN

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.

Thank you Industrial Mentors

Mr oduorUnderwriter

Geminia

Mr NjeruActuary

Alexander

Mr KalaFund Manager

ICEA

Mr JamesFund Manager

UAP

Mrs NguyoConsultantAlexander

Forbes