Hi,
I am not sure if I can explain myself be giving reference of milk bottles but I have tried to illustrate it through a real life example -
Consider a DC scheme where the employer decides to fix a contribution rate when a member joins the scheme based on his actual age and rest of the assumptions based on actuary’s judgement. Let’s say the employer wants to target a certain level of pensions say 2/3rds of the final salary after 40 years of service and wants to adopt the EAM for keeping the contribution rate same throughout the future.
Suppose 1 male and 1 female both of age 25, join the scheme at the same time. The actuary uses the EAM SCR (with entry age 25) formula below to derive the contributions for both employees under the standard assumptions (eg no decrement pre-retirement etc). He first does calculations with the post retirement annuity based on actual gender and then based on unisex annuity rate (calculated by taking average). He gets the contributions given in the table below the formula -
EASCR =
(65-25))/60 x S x (1.04/1.06)^40x a65/(S x ā40ר
Male
a65 = 13
SCR = 14%
Female
a65 = 15
SCR = 17%
Unisex(average of 13 & 14)
a65 = 14
SCR = 16%
Therefore, if he is not calculating the annuity rates differently for males and females and calculating the rates based on an average annuity rate, he is paying 16% in male’s account as opposed to 14% required and paying 16% for female as opposed to 17% required to secure same level of pension. Assuming that for next 40 years, experience is same as assumed, both the male and female will have same pot of wealth at age 65. Now if they go to secure the annuity in the market, female will get the pension which is lower than 2/3rds of her salary because the market will price annuities differently for male and female, hence she is at loss. The male will get higher that targeted pension and hence at benefit. Effectively, the female has subsidised the male.
Last edited by a moderator: Aug 23, 2010