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Prepare for pension posers

The Chartered Insurance Institute has valuable advice on how to pass the J04 pension funding options unit

Passing the pension funding options unit, known as J04, requires advisers to have a detailed understanding of all aspects of pension accumulation.

There are a total of 59 individual learning areas in J04, which is more than any other J0 paper. This means there is less opportunity for repetition of syllabus areas in the exam than in other units and consequently candidates need to possess a thorough understanding of the whole syllabus.

The main thrust of the J04 exam centres on pension accumulation. Candidates will therefore need to understand how benefits accrue within all forms of pension provision, including:

  • Basic state pension
  • State second pension (and its predecessor, known as Serps)
  • Defined-contribution schemes (including what used to be referred to as occupational money purchase schemes)
  • Defined-benefit schemes (often referred to as final-salary schemes)

Candidates will also need to know, where relevant, how each of the different types of benefit accrued are valued against both the lifetime allowance and the annual allowance.

The syllabus also touches on more specialised areas that specifically relate to occupational pension schemes, in particular defined-benefit schemes, and it is often these areas that candidates find difficult.

1. Understanding the HMRC tax regime for pensions, with particular reference to the accumulation of retirement funds

Examiners will often form the basis of a calculation question by combining the section on ’lifetime, annual and special annual allowances’ with the section on ’lifetime allowance charge, annual allowance charge and special annual allowance charge’. Be clear on the different valuation factors in each and the circumstances when each factor is used.

There are 59 individual learning areas in J04, which is more than any other JO paper

Annual allowance calculations are straightforward but candidates find valuing defined-benefit scheme accrual against the annual allowance
more challenging.

While benefit crystallisation events are more likely to be tested within J05, it is part of J04. Examiners may test a candidate’s understanding
of the different valuation factors for pre- and post- A-Day benefits or ask the candidates to undertake a tax charge calculation where benefits exceed the lifetime allowance.

2. Understanding state retirement benefits available, including the risks and suitability of contracting out of the state second pension

Questions here will focus on the eligibility to accumulate state benefits and the rates at which these benefits will accumulate.

Understand how National Insurance payment records accrue and the circumstances in which National Insurance contributions will be credited. Know the system for making classthree voluntary payments and the circumstances under which a person may rely on the NIC record of their current or former spouse.

3. Understanding the legal framework for pensions

Although this section of the syllabus is relatively short, it can allow the examiners to set you a wide variety of questions.

For this section, ensure you understand the contents of a typical statement of investment principles, compensation limits within the Pension Protection Fund and the duties, roles and responsibilities of actuaries, trustees and administrators.

4. Understanding definedcontribution pension schemes

For this section, you must know the features of different defined contribution schemes, including:

  • Self-invested personal pension schemes
  • Small self-administered schemes
  • Targeted moneypurchase arrangements

You must be able to clearly explain the rights and options for early leavers, in terms of refunds and rights to transfer, as well as describing
the features of different investment strategies including self-investment and lifestyling.

5. Understanding definedbenefit pension schemes Candidates should know how to:

Explain the main features of different types of defined benefit schemes, such as cash balance, career average, hybrid or integrated schemes

Provide an outline or detailed explanation of the main aspects of a particular valuation method for defined-benefit schemes

On this last point, particular care is needed as there are three main scheme valuations covered within the syllabus. Each one of them uses different methods and assumptions when valuing assets and liabilities.

It is crucial to know the underlying assumptions for each valuation, and also the ways in which the different valuation methods are used.

Ongoing valuation
This is used to measure the scheme’s ability to meet its “technical provisions” (its ability to meet its future pension liabilities as and when they fall due). This valuation has some scope for flexibility in the underlying assumptions used and it is the responsibility of the scheme trustees to set prudent assumptions.

It is crucial to know the underlying assumptions for each valuation

IAS19 (FRS17)
This valuation is used to assess the scheme’s surplus or deficit for inclusion within the company’s balance sheet.

Please note that while scheme trustees may be interested in the outcome of this valuation, the valuation itself is not driven by or controlled by scheme trustees.

PPF (section 143, an ’Insolvency Valuation’)
A “doomsday scenario” calculation to determine the cost of an insurance company buying out the scheme’s liabilities on the open market. This valuation is likely to produce a much higher assumed cost for the liabilities than the previous two. The actual liabilities being assessed will be capped at PPF compensation limits, which may be considerably less than some members’ full entitlement under normal scheme rules.

6. Understanding choices that are faced by early leavers and the use of transfer value analysis

Candidates will need to explain the rights and options of early leavers and outline the process for calculating a cash equivalent transfer value. They will also need to explain the methods, assumptions and considerations for a transfer value analysis report and outline the rules and conditions surrounding transfers to and from overseas pension arrangements.

7. Understanding key issues in pension accumulation

Within this section, examiners are often looking for candidates to list various factors that should be taken into account in different scenarios, such as funding a pension shortfall or listing the advantages and disadvantages of a client pursuing a particular course of action.

Candidates may also be required to demonstrate an understanding of one or more of the three ways in which pension benefits can be taken into account in a divorce scenario. These three ways are:

  • Offset
  • Earmarking
  • Sharing (sometimes referred to as splitting).


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