Unpleasant actuarial arithmetic: fair contribution rates for defined benefit pension schemes

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