ERM for pension funds: model example [5]

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Bullet points include: Question: What proportion of asset returns accrue to beneficiaries? Initial funding level increased by 1% but otherwise example unchanged (e.g. trustees’ target funding level remains 100%). Answer: Depends on riskiness of sponsor covenant, but often not much. Consistent with position if pension fund assets merely ‘collateral’ for a bond (issued by sponsor to beneficiaries). N.B. Assumptions on recovery rate, correlation and discretionary benefits. Change in benefit value if initial funding level is 101%, Market implied spread on sponsor obligations, Active, Deferred, Pensioner  / spouse

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