Analysis of Investment Policy to Achieve Funding of Pension Plan Liabilities

Abstract

Because of the large amount of wealth currently being invested in pension plans, the understanding of the potential future financial requirements of a pension is becoming increasingly important to plan sponsors.Unfortunately, the dynamic behavior of a pension plan is one of the more complex processes in the world of finance. To obtain a reasonable estimate of the projected condition of a persion plan, sophisticated models are becoming more widely used. These models can generate projections of all of the key elements of a pension plan and display the range of conditions that might result from uncertain future conditions. Pension Plan StructureTo understand the workings of a pension projection model, it is useful to first understand the overall structure of a pension plan.In a typical pension plan, the employer (or plan sponsor) promises to provide retirement benefits to employees upon completion of certain service requirements. These benefits are usually calculated by a formula based on years of service and level of pay.