Description: Interest rate changes and volatile equity returns have contributed to significant funding and expense volatility for defined benefit plans in recent years. This paper will describe the design of an option contract with payouts that are tied to the combined impact of interest rates and investment returns on the funding level of a defined benefit pension plan. Current derivatives used by plan sponsors can limit exposure to one of these risks; however, a derivative that combines these risks may provide more targeted protection to a plan sponsor at lower cost. This paper discusses several considerations in designing such a derivative. It will also briefly discuss pricing of the option. Finally, the difference in potential outcomes between plan funding with and without option ownership will be demonstrated. As an outcome of the design work, a new way to visualize pension risk that may be useful in sponsor accounting disclosures will be shown.

Description: The intent of this paper is to examine the sources of risk in defined benefit pension plans to determine the extent to which the principles of financial economics can be applied to provide new methods for measuring the cost and value of such plans. From Current Pension Actuarial Practice in Light of Financial Economics Symposium, M-RS04-1.

Description: This paper takes the position that the U.K. actuarial profession has still not come to a single view on financial economics, and the major divisions that remain continue to hamstring its policy development. From Current Pension Actuarial Practice in Light of Financial Economics Symposium, M-RS04-1.

Description: This paper shows an approach whereby future asset returns and liabilities are modeled taking into account the probability of various returns. It develops an asset-smoothing approach that uses an expected return on the asset mix and averages both historical and projected asset values. From Current Pension Actuarial Practice in Light of Financial Economics Symposium, M-RS04-1.