Actuarial methods and assumptions in the retirement benefits plans

Abstract

The main objective of any pension scheme is to fulfil target pension liabilities as they fall due. Attaining this objective requires planning, assumptions, funding and continuous monitoring. The need to recognize and make provision for benefit payments in advance, involves the actuary in placing a present value on the future commitment to pay benefits. The main calculations carried out by actuaries are to determine annual cost (required contributions) of providing the pension benefits and the level of liabilities that should be recognized at a specific point in time. Contributions inflow is occurring at a different time and in a different pattern, so that the time value of money is an important consideration. Actuarial methods and assumptions in determining both the cost and funded status of pension plans and institutions for retirement provision across the European countries are different. Project Unit Method is the most common method used for determining the required contribution rate. Also, other methods, such as: Attained Age, Entry Age and Aggregate Methods are also sometimes used. Actuarial assumptions required in the valuation of retirement are economic assumptions and demographic assumptions. The flexibility in assumption setting and the lack of standardised sensitivity analysis creating potential hazards within the pension scheme. The aim of this paper is to show the influence of various actuarial assumptions on pension benefits and provision, because pension liabilities are highly sensitive to changes in actuarial assumptions. Special attention is given to plans of defined payments after termination of employment, rendering of a service, i.e. Projected Unit Credit Method (PUCM) in accordance with IAS 19 requirements. Various simulations and sensitivity analyses are prepared in order to evaluate the parameters of the model, validation and verification of obtained results