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The Actuary The magazine of the Institute & Faculty of Actuaries
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Penrose report

John MacLeod’s letter (May 2004) concerns the Penrose report which states (in the first paragraph of the foreword) that ‘At the end of 1993 the Equitable Life Assurance Society put into effect what was to become known as the differential terminal bonus policy’.

To illustrate the letter, we may take the example of the guaranteed pension fund at age 65 being £750 and the terminal bonus expressed in cash terms being 33.33%, giving a total fund of £1,000 (750x1.3333). From 1975, the guaranteed annuity rate (GAR) at age 65 was 11.72%. The guaranteed pension payable was therefore £87.90 per annum (750x0.1172).

When in the late 1970s, the annuity rate at 65 then current (CAR) was 13% (10.92% better than the GAR as 1.1092 = 13/11.72) and the pension payable was £130 per annum (1,000x0.13) representing a terminal bonus, measured in pension terms, of 47.89% (130/87.90).

When the CAR at 65 fell to 10% (14.68% below the GAR as 10/11.72 = 0.8532) only an annuity of £100.00 per annum (1,000x0.10) was paid. The terminal bonus, measured in pension terms, was now 13.76% ((100-87.90)/87.90) while the terminal bonus in cash terms was still 33.33%.

The relation (1+terminal bonus, measured in pension terms) = (ratio of CAR to GAR)x(1+ terminal bonus, measured in cash terms) applies in both cases as 1.4789 = 1.1092x1.3333 and 1.1376 = 0.8532x1.3333.

It therefore seems, as the letter says, a false analysis to say the differential terminal bonus policy was put into effect in 1993. On the basis of the above analysis, the differential terminal bonus policy had applied since terminal bonus was first introduced in 1973.