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Causes of defined benefit pension scheme funding ratio volatility and average contribution rates

Published online by Cambridge University Press:  14 October 2011

Adam Butt
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Abstract

Simulations of a model pension scheme are run with stochastic economic and demographic factors, with an aim to investigate the impact of these factors on movements in funding ratio and average contribution rates. These impacts are analysed by running regressions of movements in funding ratio and average contribution rates against the economic and demographic factors. It is found that, for a typical scheme closed to new entrants and a balanced asset allocation including equity investment, the mismatch between discount rate movements and investment returns is by far the biggest predictor of funding ratio movements, with average contribution rates affected more by events in a few individual years rather than averaged over an entire simulation. Where the scheme invests to cash-flow match liabilities, mortality improvement becomes the most significant predictor of funding ratio movements, although mortality improvement still has little impact on average contribution rates.

Keywords

Defined benefit pensionsFunding ratioContributionsMonte Carlo methods
Type
Papers
Information
Annals of Actuarial Science , Volume 6 , Issue 1 , 16 January 2012 , pp. 76 - 102
Copyright
Copyright © Institute and Faculty of Actuaries 2011

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