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Movements of pension contributions and fund levels when rates of return are random

Published online by Cambridge University Press:  20 April 2012

Daniel Dufresne
Daniel Dufresne
Affiliation:
Department of Mathematics, Statistics and Actuarial Science, Laval University, Quebec
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Extract

This paper proposes a simple model for studying the variability of contribution rates and fund levels, when rates of return are random. The funding methods considered are those which (1) produce an actuarial liability (AL) and a normal cost (NC), and which (2) adjust the latter by a constant fraction ‘k’ of the difference between AL and the actual fund (this discrepancy is known as the ‘unfunded liability’; for a description of actuarial cost methods the reader is referred to Trowbridge (1952), Winklevoss (1977) or Turner et al. (1984)). Thus at every valuation date

total contribution = normal cost + k × (unfunded liability).

Type
Research Article
Information
Journal of the Institute of Actuaries , Volume 115 , Issue 3 , September 1988 , pp. 535 - 544
Copyright
Copyright © Institute and Faculty of Actuaries 1988

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References

Dufresne, D. (1986a). Pension funding and random rates of return, In: Insurance and Risk Theory, ed. by Goovaerts, M. et al. Riedel, Dordrecht, Holland.Google Scholar
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Turner, M. J. et al. (1984). Codification of Pension Funding Methods. Pension Standards Joint Committee of the Institute and Faculty of Actuaries.Google Scholar
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Winklevoss, H. E. (1977). Pension Mathematics: With Numerical Illustrations. Irvin, Homewood, Illinois.Google Scholar