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You are the marketing actuary for Cathedral Life, a leading life insurance
company selling a range of products, including a regular premium unit linked
group personal pension.
You have recently received the following letter from the Pension Scheme
Manager of Kent Forgings Ltd.
1 March 2010
Dear Sir,
Re: Group Personal Pension Lifestyle Fund
Kent Forgings is intending to offer its employees the option to join a new
contributory money purchase group pension scheme in the next few months.
Cathedral Life is one of the companies we are considering to run this scheme
for us, and we are particularly interested in your Lifestyle Fund, with automatic
switching. However, I have several questions regarding the operation of this
Firstly, please can you explain the principles behind lifestyle switching? Your
website states that it matches pension liabilities, and helps to immunise
pension fund proceeds against market fluctuations which I found rather
Your brochure states that when a member reaches a point 5 years prior to
his/her retirement age, you will start directing funds out of the UK Equity Tracker
Fund, and into a mixture of UK Fixed Interest and Cash. Why do you use these
two particular funds?
Finally, please could you explain why you phase the switching of funds over 60
months, rather than doing it all at once?
I look forward to hearing back from you.
Yours faithfully,
Jim Green,
Pension Scheme Manager, Kent Forgings Ltd.

Turn Over

In response to this letter, a student actuary in your team has drafted the following
report for you:

Lifestyle funds have been available for the last 5-6 years. They are not

actually a fund, but a set of investment rules that ensures that each
members fund is invested in the most appropriate assets at any point in time
Lifestyle funds aim to ensure that members benefit from equity performance
in the early years, but then have a more cautious investment policy as they
get closer to retirement, at which point the fund mix should broadly match the
nature of the liabilities
Our Lifestyle Fund is broadly similar to those of our competitors and the rules
operate as follows for each individual pension scheme member:
o In the period up to 5 years before retirement, all premiums are invested
in the UK Equity Tracker Fund
o In the 5 years prior to retirement, all new premiums are invested 75%
into UK Fixed Interest, and 25% into Cash, and
o Each month over the 60 months leading up to retirement, a proportion
of the accumulated fund is switched out of the UK Equity Tracker Fund,
and invested 75% in UK Fixed Interest, and 25% in Cash
o Switching is phased over 60 months to reduce the risk that the UK
Equity Tracker Fund is at a relatively low value on the date of switching
o The intended fund mix at retirement is 75% fixed interest, and 25%
cash (most pension scheme members are eligible to take 25% tax free
cash sum on retirement)
o Switching between funds is automated, with no charge to members
Alongside our Lifestyle Fund, we also offer members the choice of 85 other
unit linked funds, covering a wide range of different investments. Pension
scheme members are able to switch out of the Lifestyle Fund and into any
other fund at any time there is no charge for the 1st such switch in any one
calendar year
Equities have consistently out-performed fixed interest investments over
longer time periods, with cash investments performing even worse
For a given age/annuity payment level, we base the purchase price of a
pension annuity on prevailing fixed interest bond yields, with a margin to
allow for profit and future improvements in mortality (most other insurance
companies use a similar methodology)

Draft a suitable letter to Mr Green in approximately 500 words, covering the

points raised by him.
You can assume that all the information provided to you by the student is correct,
and you should ignore any taxation issues.
[Total: 50 marks]