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The funding for a Defined Benefit (DB) pension plan based on the fair valuation of the plan's insolvency risk

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Abstract:

This study provides a contingent claims valuation approach model to value a sponsor's claim on a salary-related, defined benefit (DB) pension plan. The model is further developed to numerically estimate a suggested optimal contribution cost that allows the sponsor to fairly bear the risk of the plan's insolvency. The results demonstrate that the traditional actuarial valuation underestimates the cost of pension benefits, and that the normal contribution cost is not enough for the sponsor to fairly charge the value of bearing the plan's insolvency.

Document Type: Research Article

DOI: https://doi.org/10.1080/00036840500215279

Affiliations: Department of Economics, Tamkang University, 151 Ying-chuan Road, Tamsui, Taipei County, Taiwan 251, ROC, Email: Chen@mail.tku.edu.tw

Publication date: 2005-08-10

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