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Title: Valuation of Contingent Pension Liabilities and Implementation of Conditional Indexation

Event details of Insurance seminar: Hans Schumacher (University of Tilburg)
Date 14 April 2008
Time 12:00 -13:00
Location Roeterseilandcampus - building A

Title: Valuation of Contingent Pension Liabilities and
Implementation of Conditional Indexation

Abstract: We formulate the circularity problem that may arise in the valuation of conditionally indexed pension liabilities. Namely, the funding ratio determines the indexation level through a chosen indexation rule (often known as a "policy ladder"), but at the same time the indexation level may, with market valuation of pension liabilities, have a feedback effect on the liability value and in turn on the funding ratio. We develop a backward recursion approach to the valuation of liabilities subject to the circularity constraint. Numerical examples are used to show the impact of investment strategies and indexation rules on the liability value. The current practice of conditional indexation uses as the basis for indexation decisions a proxy of funding ratio, rather than the funding ratio based on market-based valuation, and in this way avoids the circularity problem. Our findings show that the proxy of funding ratio may be misleading in assessing the actual financial status of pension funds, and for this purpose the actual funding ratio needs to be computed and used.

The seminar will take place in A-building, see below for the address.

Roeterseilandcampus - building A

Nieuwe Achtergracht 166
1018 WV Amsterdam

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