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Effects of Gainsharing Provisions on the Selection of a Discount Rate for a Defined Benefit Pension Plan

Author

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  • Robert J. Rietz

    (Michigan State University, 220 Trowbridge Rd, East Lansing, MI 48824, USA)

  • Evan Cronick

    (Michigan State University, 220 Trowbridge Rd, East Lansing, MI 48824, USA)

  • Shelby Mathers

    (Michigan State University, 220 Trowbridge Rd, East Lansing, MI 48824, USA)

  • Matt Pollie

    (Michigan State University, 220 Trowbridge Rd, East Lansing, MI 48824, USA)

Abstract

This paper examines the effect of gainsharing provisions on the selection of a discount rate for a defined benefit pension plan. The paper uses a traditional actuarial approach of discounting liabilities using the expected return of the associated pension fund. A stochastic Excel model was developed to simulate the effect of varying investment returns on a pension fund with four asset classes. Lognormal distributions were fitted to historical returns of two of the asset classes; large company stocks and long-term government bonds. A third lognormal distribution was designed to represent the investment returns of alternative investments, such as real estate and private equity. The fourth asset class represented short term cash investments and that return was held constant. The following variables were analyzed to determine their relative impact of gainsharing on the selection of a discount rate: hurdle rate, percentage of gainsharing, actuarial asset method smoothing period, and variations in asset allocation. A 50% gainsharing feature can reduce the discount rate for a defined benefit pension plan from 0.5% to more than 2.5%, depending on the gainsharing design and asset allocation.

Suggested Citation

  • Robert J. Rietz & Evan Cronick & Shelby Mathers & Matt Pollie, 2017. "Effects of Gainsharing Provisions on the Selection of a Discount Rate for a Defined Benefit Pension Plan," Risks, MDPI, vol. 5(2), pages 1-10, June.
    • Handle: RePEc:gam:jrisks:v:5:y:2017:i:2:p:32-:d:102044
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    References listed on IDEAS

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    1. John Piggott & Emiliano A. Valdez & Bettina Detzel, 2005. "The Simple Analytics of a Pooled Annuity Fund," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(3), pages 497-520, September.
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    Cited by:

    1. Albert Cohen, 2018. "Editorial: A Celebration of the Ties That Bind Us: Connections between Actuarial Science and Mathematical Finance," Risks, MDPI, vol. 6(1), pages 1-3, January.

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