2011185

You are an independent pension fund valuator. You have been approached
by an attorney to do a loss of income calculation for a court case relating to
an accident claim.  The client is an actuarial student who only has the
fellowship exam outstanding and has been paralysed as a result of the
accident. 
i) What professional issues should you consider before taking on such an
assignment?          (6)
You would need to consider the following professional issues:
Competence – Us as the independent pension fund evaluator should act in a professional
manner, adhere to the professional guidance, and adhere to the corporate responsibilities.
Therefore, ensuring that you will act in this manner and that you have the necessary
expertise/experience to take on this case. Ensure you are able to provide an accurate
assessment of the loss of income due to the accident.

Integrity – Account for all the views of the student and identify any conflict of interest that
may occur in the case. By integrity we refer to the quality of being honest, trustworthy, and
consistent in our actions and decisions. Being transparent with regards to our methods,
assumptions, and data sources. Integrity also requires us to maintain communications with all
parties involved (attorney, the student, etc.). We should ensure our reports are presented in a
clear way and is understandable (Any limitations in our analysis should be appropriately
disclosed.). Ensure all discissions are free from any bias and are independently made.
Conflicts of interest – Being involved with the insurance company or the attorney before
could impact our integrity and result in conflict of interest. Disclosing any previous
relationships that we may have with any of the parties involved in the case, would be
professional.
Compliance with regulatory requirements - We should ensure that we comply with any
regulatory requirements, e.g., ensuring our report of the appropriate standards.
Clear communication with all parties - ensuring important matters are clearly communicated
with all parties and ensuring that their demands are heard (parties referring to the attorney
and student). Understanding what the stakeholders require is important and good
communication would be necessary. Provide any rational for any decision made.

Confidentiality - Since this is a court case, client confidentiality should be maintained thus all
information and disclosures are made to the appropriate parties (attorney).

Ethical Considerations - Ensuring the work is of the highest ethical standards.

Adherence to guidelines – Consideration for the adherence to professional guidelines such as
the Advisory Practice Notes by ASSA

ii) Describe the elements of the valuation basis that would apply and how
these are likely to be set.                 (12)
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Basis - The best estimate basis strikes a balance between optimistic and prudent
(conservative) bases and is, therefore, the most appropriate to use for the valuation basis in a
loss of income calculation for a court case. This estimate gives equal probability of being
over and underestimated.
Legislation and regulation - The valuator must be aware of the relevant requirements and
guidelines in their jurisdiction and ensure the valuation basis is consistent with these
requirements. Consider the statutory requirements, legal precedents, professional standards,
and the taxation.
Discount Rate - The discount rate is the rate at which future income streams are discounted to
reflect the time value of money. When setting the discount rates (Reflect the long-term future
investment return expected.) used to value the Assets and liabilities, consistency between the
two rates is important to consider.
Earnings before the accident – This would estimate the earnings of the student before his
accident (before taking on the fellowship exam). Could use his past employment to set the
basis.
Earnings after the accident – This would estimate the students future income (if he were to
get his fellowship). This could be tricky since we may need to account for the chance that he
may have been unable to pass his fellowship (even if the accident did not occur). Hence, his
past results and exams should be analysed and accounted into identifying whether we assume
that he would pass or not. This will allow us to get a more accurate representation of his
future income.
Expected duration till retirement - would depend on the current age of the student and his
expected retirement age. The expected duration till retirement would be used to estimate his
total future income that the student would have earned if he was not paralysed.
Inflation - adjust the future income to be accounting for inflation (changes in inflation). We
could base the rates of inflation using past data.
Duration of loss - Estimate the length of time for which the students will experience any loss
of income. Evaluating the student’s injury would help.
Provisioning for unforeseen events - help account for any uncertainties or unforeseen events
that could affect the calculation of the loss of income. E.g., changes in economic conditions,
technological advancements, etc.
Bonuses/Benefits or extras – this would account for any benefits that the student may have
received if he was employed and able to work. I.e., health insurance
Medical cost – this would account for any extra medical cost that may incur in his life now
due to the disability. I.e., wheelchair assistance.
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Improvements in future career - This can be used to estimate the potential for improvements
in his career even after his fellowship. I.e., promotions, etc.
Taxes - This can be used to account for any taxes that should be accounted for in his future
income. The tax rate would vary.