Institute and Faculty of Actuaries (IFoA) Exams Pensions, Health and Investment Specialisms (SP4, SP1, SP5, SP6, SP9) Syllabus

Pensions, Health and Investment Specialisms (SP4, SP1, SP5, SP6, SP9) syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Pensions, Health and Investment Specialisms (SP4, SP1, SP5, SP6, SP9) in Institute and Faculty of Actuaries (IFoA) Exams, not a summary of it.

1. 1

   Pensions and Other Benefits (SP4)

   3 topics

   • Types of pension scheme
     • Defined benefit and defined contribution schemes
     • State pension and auto-enrolment framework
   • Funding and valuation
     • Actuarial funding methods and assumptions
     • Technical provisions and the Pensions Regulator framework
     • Scheme funding, deficits and recovery plans
   • Pension scheme risk management
     • Liability-driven investment and de-risking
     • Buy-ins, buy-outs and longevity swaps
2. 2

   Health and Care Insurance (SP1)

   3 topics

   • Health and care products
     • Private medical insurance
     • Income protection and critical illness
     • Long-term care insurance
   • Pricing and reserving for health products
     • Morbidity and inception/recovery rates
     • Claim cost inflation and medical trend
   • Underwriting and risk classification
3. 3

   Investment and Finance Specialism (SP5 and SP6)

   3 topics

   • Investment management (SP5)
     • Asset classes and their characteristics
     • Portfolio construction and performance measurement
     • Liability benchmarks and strategic asset allocation
   • Financial engineering and derivatives (SP6)
     • Pricing and hedging of derivatives
     • Exotic options and structured products
     • Greeks, dynamic hedging and model risk
   • Risk measurement in investment
4. 4

   Enterprise Risk Management (SP9 / CERA)

   3 topics

   • ERM frameworks
     • Risk appetite, tolerance and governance structures
     • Risk culture and the three lines of defence
   • Risk quantification
     • Economic capital and risk aggregation
     • Copulas and dependency modelling
     • Extreme value theory and stress testing
   • Risk response and reporting
     • Risk mitigation and capital allocation
     • Emerging risks and scenario analysis

Pensions, Health and Investment Specialisms (SP4, SP1, SP5, SP6, SP9) flashcards for Institute and Faculty of Actuaries (IFoA) Exams

18 of 51 cards from the Pensions, Health and Investment Specialisms (SP4, SP1, SP5, SP6, SP9) deck — real questions with worked answers.

1. What are the two principal types of occupational pension scheme, defined by how benefits are determined?

   Defined Benefit (DB): benefit is set by a formula (e.g. based on salary and service) and the sponsor bears the investment/longevity risk. Defined Contribution (DC): contributions are fixed, the benefit equals the accumulated fund, and the member bears investment and longevity risk.

2. In a final salary DB scheme, how is the annual accrued pension typically calculated?

   $\text{Pension} = \frac{\text{Pensionable service (years)} \times \text{Final pensionable salary}}{\text{Accrual rate denominator}}$, e.g. with a $\frac{1}{60}$ accrual rate, $\text{Pension} = \frac{N}{60} \times S_{\text{final}}$ where $N$ is years of service.

3. What is a Career Average Revalued Earnings (CARE) scheme?

   A DB scheme where each year's accrued pension is based on that year's pensionable earnings, and accrued amounts are revalued (indexed) each year up to retirement. It reduces the cross-subsidy to high late-career earners compared with final salary.

4. Distinguish a hybrid pension scheme from pure DB and pure DC.

   A hybrid scheme combines DB and DC features, sharing risk between sponsor and member. Examples: DB underpin on a DC pot, cash balance schemes (guaranteed contribution-based lump sum), or nursery DC plus DB top-up.

5. What distinguishes a funded from an unfunded (pay-as-you-go) pension arrangement?

   Funded: contributions are invested in advance to build assets backing the liabilities. Unfunded/PAYG: benefits are paid from current revenue (e.g. taxation) with no accumulated assets; common for state and some public-sector schemes.

6. State the fundamental funding equation linking contributions, assets and liabilities for a pension scheme.

   $$\text{PV(Future contributions)} + \text{Current assets} = \text{PV(Future benefits)} + \text{PV(Future expenses)}$$ The actuary chooses a contribution rate so this balances under the funding assumptions.

7. Define the funding level (funded ratio) of a pension scheme.

   $$\text{Funding level} = \frac{\text{Market (or actuarial) value of assets}}{\text{Actuarial value of liabilities}}$$ A ratio above 1 (100%) indicates a surplus; below 1 indicates a deficit on the chosen basis.

8. What is the Projected Unit Method (PUM) of valuation and when is it appropriate?

   PUM values benefits accrued to the valuation date but uses projected (final) salaries. The standard contribution rate is the cost of one further year's accrual for the active membership. Appropriate for an ongoing scheme with a stable, mature age profile.

9. How does the Current Unit Method differ from the Projected Unit Method?

   The Current Unit Method values accrued benefits using current (not projected) salaries, giving a lower initial liability and standard contribution rate but a faster-rising contribution rate as members age. Suitable for closed schemes or where future accrual will cease.

10. Define the standard contribution rate (SCR) under a funding method.

    The SCR is the contribution rate, usually expressed as a percentage of pensionable salaries, required to fund the benefits accruing over the control period assuming the scheme is exactly funded. $$\text{SCR} = \frac{\text{PV(benefits accruing in period)}}{\text{PV(pensionable salaries in period)}}$$

11. What is the role of the discount rate in a pension liability valuation, and how is it often chosen?

    It converts future benefit cash flows to present value. A higher discount rate lowers the liability. It may be set on a market basis (e.g. government bond or corporate bond yields plus margin) for solvency/accounting, or on an expected-return-on-assets basis for ongoing funding.

12. List the main risks faced by a defined benefit pension scheme.

    Investment/market risk, interest-rate (discount-rate) risk, inflation risk, longevity risk, salary-growth risk, sponsor covenant (default) risk, liquidity risk, and operational/regulatory risk.

13. What is sponsor covenant risk and why does it matter for a DB scheme?

    It is the risk that the sponsoring employer becomes unable or unwilling to make required contributions or make good a deficit. A weak covenant reduces the security of members' benefits and typically argues for a more prudent funding basis and lower-risk investment strategy.

14. Explain Liability-Driven Investment (LDI) for a pension scheme.

    LDI structures assets (often bonds and interest-rate/inflation swaps) so their value moves with the liabilities as discount rates and inflation change, hedging interest-rate and inflation risk and stabilising the funding level rather than maximising return.

15. What is a longevity swap and how does it manage pension risk?

    A longevity swap exchanges fixed (expected) pension payments for floating (actual) payments based on realised mortality of the scheme. It hedges longevity/mortality-improvement risk: if pensioners live longer than expected, the counterparty pays the excess.

16. Compare a buy-in and a buy-out as DB de-risking strategies.

    Buy-in: the scheme purchases a bulk annuity policy held as an asset; the trustees remain responsible for paying members. Buy-out: liabilities are fully transferred to an insurer which issues individual policies and the scheme can wind up; members become the insurer's policyholders.

17. What is interest-rate (duration) immunisation and Redington's conditions?

    Immunisation matches asset and liability sensitivity to small interest-rate changes. Redington's conditions: (1) PV of assets = PV of liabilities; (2) duration of assets = duration of liabilities; (3) convexity (spread) of assets $\geq$ that of liabilities.

18. List the main categories of private health and care insurance products.

    Private Medical Insurance (PMI), Critical Illness (CI) cover, Income Protection (IP)/Permanent Health Insurance, Long-Term Care Insurance (LTCI), and Health Cash Plans.

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