APT·FUNDING · Module 4: Funding, Benefits and Member Protection·UnitFUNDING · Unit 01Access: Premium
Unit 4.1: Actuarial Valuation and DB Funding Principles
Unit 4.1 covers how a defined benefit scheme works out what it needs. It takes in the methods used to value assets for an actuarial valuation, the principles of funding defined benefit liabilities, and the different funding measures a scheme may be shown against, all three marked DB only in the syllabus, together with the importance of complete, accurate and up-to-date member data and calculations, which matters just as much in a defined contribution scheme. Data quality is the topic with the widest reach here, because a valuation and every benefit calculation rest on the records behind them.
What’s in it.
4 topics- Topic 01
Methods of Valuing Assets for Actuarial Valuations (DB Only)
35 questions - Topic 02
Principles of Funding Defined Benefit Liabilities (DB Only)
40 questions - Topic 03
Different Types of Funding Measures (DB Only)
32 questions - Topic 04
The Importance of Complete, Accurate and Up-to-Date Data and Calculations
46 questions
Sample questions
3 of manyA few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.
Why might a discounted income approach show a different funding level from a market value approach on the same date?
- Because it is calculated by a different professional body, rather than using a different valuation technique
- Because it excludes contributions received during the year
- Because it only applies to assets held outside the United Kingdom
- Because it averages prices over a period, not the exact market priceCorrect answer
ExplanationBecause the discounted income approach averages asset prices over a period rather than striking the price exactly at the valuation date, its asset figure, and therefore the resulting funding level, can differ from the market value figure calculated on the same date. Key takeaway: the difference stems purely from how the asset price is derived, not from a different liability calculation.
A trustee is comparing several liability figures quoted for the same scheme and needs to identify which one is the technical provisions figure. Which description correctly identifies it?
- The best-estimate liability figure with a roughly 50/50 chance of proving sufficient
- The prudent, statutory funding target under the Pensions Act 2004Correct answer
- The prudent, low-risk funding basis under the scheme's funding and investment strategy
- The standardised figure the Pension Protection Fund uses to calculate the risk-based levy
ExplanationTechnical provisions is specifically the prudent, statutory funding target defined under the Pensions Act 2004 and measured against under the Statutory Funding Objective, distinct from the accounting basis, buy-out cost, PPF levy basis or low dependency basis, each of which serves a different purpose. Key takeaway: technical provisions is identified by its statutory, prudent, Pensions Act 2004 basis, not by any other measure's characteristics.
What kind of assets are most straightforward to value using the market value approach?
- Unlisted infrastructure investments
- Bespoke insurance-based contracts such as buy-in policies
- Direct holdings of commercial property
- Listed assets such as quoted equities and giltsCorrect answer
ExplanationListed assets trade on public markets with continuously observable prices, making them the most straightforward to value at market value; illiquid or bespoke holdings need additional valuation techniques. Key takeaway: an observable daily market price is what makes market value simple to apply.