Market Consistent Valuation And Funding Of Cash Balance Pensions

Details

Supervisors

Hainaut, Donatien

Faculty

Faculté des sciences

Degree label

Master [120] en sciences actuarielles, à finalité spécialisée

Abstract

Cash-balance (CB) pension plans are a mixture of Defined benefit (DB) and Defined contribution (DC) pension plans: they are legally recognized as DB plans but the plan sponsor makes an annual contribution to the participant's notional account hence the resemblance to DC plans. That way, many DB pension plans converted to CB plans in the aim of potentially reducing costs while staying in the DB category for regulatory purposes. This paper aims to analyze the CB pension and contributions using the methods and principles of financial economics to give a market consistent evaluation of the CB liability's costs. In this context, CB benefits, viewed as financial liabilities, are accumulated at guaranteed crediting interest rates which can be retrieved from government bonds yields for instance and valued using financial models; such as the Hull and White and the Heath-Jarrow-Morton models.