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Abstract
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There are two main risks plan sponsors face when funding defined benefit pension plans: volatility of contributions and volatility of the funded ratio (assets over liabilities). Very generally, volatility of contributions and volatility of the funded ratio are inversely related. The relationship between these two risks has been described under a set of several simplifying assumptions such as a stationary population, one asset class, a fixed amortization method of unfunded liabilities, and constant interest rates. Recent work of Owadally and Haberman [NAAJ, January 2004] explores this relationship more deeply by varying amortization methods and allowing different (static) asset allocation methods. Due to the long-term nature of pension funds, the next most obvious assumption to relax is that of constant interest rates. The goals of this talk are to introduce the classical relationship between volatility of contributions and volatility of the funded ratio, summarize the recent work of Owadally and Haberman, and outline the issues that arise when dynamic interest rates are introduced. |
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