Actuarial Notes

Analysis of Target Benefit Plan Design Options

By Barbara Sanders · Society of Actuaries · 2016

Study guide: Exam RET-101

A February 2016 report, sponsored by the SOA's Pension Section, that documents the stochastic models used to investigate how different target benefit plan design features and funding strategies affect performance over the short and long term. In a Canadian context target benefit plans are collective pension schemes whose target benefit is defined in advance but not guaranteed. The report also gives background and context for the project's Issue Briefs.

On the syllabus

  • Exam RET-101 — Analysis of Target Benefit Plan Design Options, SOA, February 2016, pp. 12-16 (printed page numbers, which cover the Key Findings section); Outcome 1a.

1 Background and Motivation

2 Process

3 Performance Metrics

4 Asset Model

5 Liability Model

  • Plan membership
  • Elements of TBP design
  • Plan provisions
  • Assumptions
    • Valuation frequency
    • Salary progression
    • Discount rate

7 Key Findings

  • Choice of asset mix
    • The choice of investment mix has a greater impact on the size of adjustments than on their frequency.
  • Choice of discount rate
    • Valuing all benefits at the risk-free rate (assumption set A) is compared with the best-estimate rate (set B), and with using one rate to value converted benefits at inception and the other for the affordability test (sets C and D).
  • Triggers and actions
    • When the plan has only a single trigger for action, benefits are volatile, and a “no-action range” can reduce the frequency of benefit changes.
  • Adjusting the target accrual rate
    • Designs 8 and 9 explore adjusting the target accrual rate at the same time as accrued benefits, and before them.
  • Other comments

8 Areas for Further Exploration

Appendix A Examples of Performance Metrics

Appendix B Summary of Model Outputs

Sources