Actuarial Costing Methods Used in Insured Pension Schemes in Kenya

Abstract

This was an exploratory research whose primary objective was to document the actuarial costing methods used in insured pension schemes in kenya. The secondary objectives investigated were: (i) What reasons influence the choice of the actuarial costing methods, (ii) Whether the life offices combine actuarial costing methods to provide different benefits within a scheme and, (iii) Whether any difficulties are encountered in the use of the actuarial costing methods and if there be, the corrective measures employed to counter them. This research was prompted by the general absence of pertinent information on actuarial costing methods used in insured schemes in kenya. The primary data for this research was collected by use of the questionnaire supported by a brief description of the actuarial costing methods that was annexed in the questionnarie. This information was sought from 8 life offices that transact pension business in kenya, 7 of which responded. The data gathered was presented using summarized tabulations and proportions. The major findings were that six actuarial costing methods were used to cost pension schemes. Ranked in order of frequency of use are: Defined contribution method (55% of schemes), Aggregate Level-Cost methods (22% of schemes), Accrued Benefit method, Entry Age Normal Cost method (which tie - 9% of the schemes), Projected unit method (4% of the schemes) and Attained (ix) Age Cost method (1% of the schemes). It was also revealed that the specific schemes characteristics coupled with the advantages that each method offer, influenced the choice of the actuarial costing method to use. The basic scheme characteristics cited were: the benefit formula specified by the plan sponsor, the rate of flow of new entrants into the scheme, the funding instruments selected for use, age and sex distribution of the membership, the degree of flexibility_ in contribution rate desired by the plan sponsor, the • membership size of the scheme, the employees requirement for security of their benefits, the plan sponsor's affluence and cash flow position, as well as the basis of contribution rate specified by the plan sponsor. Regarding benefits offered, it was revealed that schemes offered a wide range of benefits. However, schemes, secured on conventional life policies offered a larger package of benefits combining both retirement-income,death income and supplemental benefits. Whereas schemes secured on deposit administration contracts mostly offered retirement and death incomes. Supplemental benefits' were also offered under these schemes on demand at an accelerated rate. No life office combined actuarial costing methods to provide benefits within a scheme. Similarly, no office had difficulties in applying the actuarial costing methods.