COMPARISON MECHANICS OF NORMAL COST OF FIXED PENSION PLANS FUNDING POLICY UNDER PROJECTED UNIT AND THE ENTRY AGE METHODS

Gbenga Michael Ogungbenle, Joshua Solomon Adeyele

Abstract


The normal cost and liabilities of any defined benefits pension plan are sums of money payable at various times in the future. Current legal and regulatory requirement for defined benefits pension schemes can result in different actuarial valuation models for such a scheme at any particular point in time. Using two of the valuation models, this paper considers whether across the two different valuation bases, there is consistency in the normal cost of the reported results when compared. This paper cross-examines and analyses the normal costs of the two common funding methods used in the financial sector, applies them to a model pension scheme and then evaluates the results. The only difference in the two funding methods actually relates to the timing of contributions but the overall long term cost of the scheme is the same. The choice of a funding method should maintain a balance of both the members' and plan sponsor's interests. While the members may need sufficient security of their pension funds, the plan sponsor may prefer considerable flexibility even when the scheme's funding level is below the statutory minimum.

Keywords


defined benefit, normal cost, liability, exponential, projected unit method, entry age, normal.

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International Journal of Management Science Research ISSN ISSN 2536 – 605X(Print)

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