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Unpleasant Actuarial Arithmetic: Fair Contribution Rates for Defined Benefit Pension Schemes

Author

Listed:
  • Kenjiro Hori

    (Birkbeck, University of London)

  • Stephen Wright

    (Birkbeck, University of London)

Abstract

We derive key properties of the actuarially fair contribution rate for defined benefit (DB) schemes, that equates scheme assets to liabilities for any given scheme member. The unpleasant actuarial arithmetic of both increased life expectancy and (especially) negative real yields has resulted in a massive rise in the fair contribution rate over recent decades. At present there appears to be little prospect of these rises being reversed. We analyse the implications for the viability of DB schemes, and consider the (potentially significant) impact of incorporating systematic risk into benefits.

Suggested Citation

  • Kenjiro Hori & Stephen Wright, 2022. "Unpleasant Actuarial Arithmetic: Fair Contribution Rates for Defined Benefit Pension Schemes," Birkbeck Working Papers in Economics and Finance 2201, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:2201
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    File URL: https://eprints.bbk.ac.uk/id/eprint/47651
    File Function: First version, 2022
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    More about this item

    Keywords

    defined benefit; pension contribution rate;

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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