Question:

Car Maker Ltd is a multinational. In one of the countries where it is present, current legislation makes it compulsory for companies to pay a gratuity lump sum at retirement equivalent to 150% of the monthly salary per complete year of service. For companies which have a pension scheme in place, they can deduct 100 times the monthly pension off the gratuity lump sum payment. Car Maker Ltd wants to put in place a final salary DB scheme to fund in advance this gratuity benefit

a) What is the minimum accrual rate that will ensure that Car Maker will have no liability at retirement in respect of the gratuity?

b) How will your answer to (a) above change if Car Maker Ltd defines pensionable salary as the average over the last 5 years instead of using final salary? Explain

c) On a purely cost basis, is it in the interest of Car Maker to set up a DB scheme with the minimum accrual rate to fund for the gratuity lump sum assuming that retirement age is 65 and life expectancy at retirement is 12 years? Explain

d) How would your answer to (c) above change if all employees of Car Maker Ltd were females instead of males? Explain