Comparison between some pension funding schemes in a deterministic continuous environment

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Pierre Devolder~Valérie Goffin, Belgique
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Summary:
Amongst the various funding methods applied for a defined benefit pension plan, two important classes can be considered: the unit credit cost method and the individual level premium method.The unit credit cost methodology is built on a fixed level of actuarial liability (from which the contributions due are derived); the individual level premium philosophy is directly expressed in terms of contributions stability.The purpose of this paper is to compare from a theoretical perspective the two methods using closed forms based on classical calculus. We obtain explicit results for the contributions in a continuous dynamic economy and analyze the effects of growing salaries as well as the consequences of financial gains or losses. The main conclusion is the danger of individual level premium methods generally leading to non-bounded contributions in this continuous model and the advantage to adopt unit credit valuation as recommended by the IAS norms.
 
Date: 30 May - Time: 13:45 to 15:15 - Room: 253
Theme: 3.A. Actuarial problems related to the retirement of the baby-boom