Cash Balance Pension Schemes

Announcement from European Actuarial Academy

Traditionally, occupation pension plans are fully funded and based on an architecture either in Defined Benefits (DB) or in Defined Contributions (DC).  In DB, the plan describes the level of pension benefits (generally based on salaries and career duration) and the contributions have then to be actuarially computed. In DC, the plan describes the level of contributions and the benefits are simply generated by the financial accumulation of these contributions. However, hybrid solutions have emerged in the international pension landscape, trying to combine in some sense the logic of DB and of DC.

These new kinds of pension schemes have appeared as well for the first pillar (social security) (Notional accounts or NDC for instance) as for occupational pension plans (Cash Balance- CB). The starting idea of CB (which are still fully funded solutions) is similar to DC: The plan describes a level of contribution accrued for each affiliate. Then these notional contributions are accumulated using a notional return (fixed rate or interest rate index defined ex ante) to deliver at retirement the pension benefits. The return is notional because on the asset side, the real financial returns of the pension fund can be different. This discrepancy of returns generates real contributions to be paid by the sponsor, different from the notional contributions allocated to the individual accounts.

The objective of this web session is to give an overview of these Cash Balance mechanisms and illustrate some interesting actuarial problems of the topic. In a first part, we will define the concept of CB and compare it with other pension schemes. We will present advantages and disadvantages for all the parties. We will look at the effect of introducing a legal minimum return in the system. The second part is devoted to more quantitative studies. First, we will develop some financial valuation issues induced by the technique. We will look also at preferences between CB and DC in terms of utility function as well for the sponsor as for the affiliates; we will show in particular that we can express the problem as the Nash equilibrium of a game between the sponsor and the affiliates. 

Participants

The web session is open to all interested persons, especially for pension actuaries and everybody motivated by occupational pension schemes or financial modelling.

Technical requirements and test session

Please check with your IT department if your firewall and computer settings support web session participation (the programme Zoom will be used for this online training). Please also make sure that you are joining the web session with a stable internet connection.

Click here to make a reservation: Your early-bird registration fee is € 150.00 plus 19% VAT for bookings by 18 January 2024. After this date, the fee will be € 205.00 plus 19% VAT.