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A Valuation of Company Pension Schemes in ERBSA using Projected Unit Credit Method

  • Journal of Insurance and Finance
  • 2006, 17(3), pp.3-33
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Sung Jooho 1

1경희대학교

Accredited

ABSTRACT

As for a defined benefit pension plan in Korea, Employee Retirement Benefit Security Act(ERBSA) require that the retirement benefit to be paid out to qualified members is pre-defined in such a lump-sum form that at least 1/12 × annual salary at retirement × duration-year of work service. And also, funding period and pensionable period each are clearly distinct and independent. Considering these two characteristics, we focus on deriving an actuarial liability and normal cost using projected unit credit method(hereafter, simply denoting PUM) for the reason that PUM is recommended by IASB a unique funding method in company pension plans and yet this method is not popular and even not well studied. So, we show firstly its funding mechanism and then derive 6-type dynamic actuarial models characterized by linear first-order recursive equations, respectively. Next, our numerical illustrations indicate that each of age-specified actuarial liability and normal cost calculated by PUM, depend largely on the difference between salary growth rate and valuation interest rate(called net interest rate) and also the age structure of workforce makes a great potential impact on the financial burden on sponsoring employer because of the normal cost by PUM being similar to natural premium. Lastly, this paper could give an efficient and admissible funding solution to our financial institutions authorized as pension plan administrator.

Citation status

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