Retirement Shares Plan: A New Model of Risk Sharing

Investment risk and longevity risk are borne by the plan sponsor in a defined benefit (DB) plan or by the plan participant in a defined contribution (DC) plan. By contrast, our proposed Retirement Shares Plan (RSP) allocates the longevity risk to the plan sponsor and investment risk to the plan participant. The RSP allows the participant sufficient control over the investment risk to tailor that risk to his specific circumstances. This allocation of risk provides predictable and stable cost to the plan sponsor with little chance of unfunded liabilities. The retiree receives lifetime income and potential inflation protection

Observations on Actuarial Assumptions and Models for Defined Benefit Pension Plans

The goal of this paper is to review and comment on certain aspects of the Pension Insurance Modeling System (PIMS) and certain actuarial assumptions used by PIMS. The apparent stability of the deficit and funding ratio of the PBGC are partially dependent on a continued stream of premium payments from plan sponsors. However, derisking and other trends among retirement plans may change the pattern of premium income. Deterministic projections that supplement the stochastic simulations may enhance the understanding of the current deficit and the projected net claims over the next ten years

Technical Review Panel for the Pension Insurance Modeling System (PIMS)

In April of 2013, the Pension Research Council of the Wharton School at the University of Pennsylvania convened a Technical Review Panel, comprising ten experts whose task it was to review the Pension Benefit Guaranty Corporation’s (PBGC) Pension Insurance Modeling System (PIMS), including inputs, outputs, and model assumptions. The review was intended to provide a formal evaluation of the technical adequacy of the model by outside experts. Each expert participating on the Technical Panel was asked to review background material (see References) and focus on a particular aspect of the PIMS model. The list of panelists and topics was developed by the Council in discussion with the Social Security Administration (SSA). This report and the appended papers herein from our Technical Panel comprise the Final Report under this project. The Panel’s key findings may be summarized as follows: (1) The PIMS models are an important and valuable tool in modeling the Agency’s liability risk. To the best of our knowledge, there is no other model that can do a comparable job. (2) Nevertheless, some improvements could be integrated in the Agency’s approach to modeling. Those deserving highest priority attention in the experts’ view are the following: (a) Incorporating systematic mortality risk (i.e., treat mortality and longevity as stochastic variables); (b) Including new asset classes increasingly found in defined benefit plan portfolios (e.g., commercial real estate, private equity funds, infrastructure, hedge funds, and others); (c) Developing a more complex model for the term structure of interest rates; and (d) Incorporating an option value approach to pricing the insurance provided. (3) The Agency could also do more to communicate the range of uncertainty and potential for problems associated with the PBGC’s financial status. This could include additional information including the Conditional Value at Risk (CVaR), and perhaps an ‘intermediate,’ ‘optimistic,’ and ‘pessimistic’ set of projected outcomes, as well as the expected ‘date of exhaustion’ for assets backing pension benefits insured by the PBGC.Social Security Administrationhttp://deepblue.lib.umich.edu/bitstream/2027.42/102265/1/wp290.pd

Risk Allocation in Retirement Plans: A Better Solution

The corporate world is reconsidering the cost-effectiveness of defined benefit pension plans while contemplating a change to defined contribution plans. This article begins by examining the three primary risks faced by sponsors of most DB pension plans-investment risk, interest rate risk, and longevity risk-and shows how shifting these risks to employees through a DC plan would affect both the corporation and the individual. Although DC plans clearly help companies manage risks, they provide at best an incomplete solution for individual participants. 2006 Morgan Stanley.