Cash balance pension schemes (14/05/2024) (3 CPD)
Abstract:
The starting idea of Cash Balance schemes (CB) 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 training is to discuss different topics about the concept of CB.
In a first part, we introduce CB as hybrid solutions between DB and DC. The second part is devoted to the valuation of CB, using traditional actuarial funding methods (unit credit, entry age, aggregate …). We illustrate also similarities between CB and Notional Defined Contributions systems (NDC) used in the first pillar.
In the two last parts, we present some stochastic developments. We first introduce market valuations of CB, especially when the credited interest follows a stochastic index such as bond yield.
Finally, we look at preferences between CB and DC in terms of utility function as well for the sponsor as for the affiliates; we show in particular that we can express the problem as the Nash equilibrium of a game between the sponsor and the affiliates.
Lecturer: Pierre Devolder, Professor UCL
Some practical information:
The training will take place using TEAMS. The link will be provided to the participants the day before the training will take place.
In case of any question, please contact us.