Defined Benefit Pension Plan

Abstract

A major application of multiple decrement models is in pension plans and employee benefit plans. In these schemes, the benefit paid on termination of employment depends upon the several causes of termination. The cause of termination may be withdrawal, disability, death or retirement. The benefits on retirement often differ from those payable on death or disability. As a consequence, the actuarial present value of the benefits depends on the cause of death along with the future life time of an individual. To determine the rate of contribution in pension funds and to value the pension fund at specified times, it is necessary to find the actuarial present value of the benefits. Therefore, survivorship models for employee benefit systems and pension funds include random variables for both time to termination and cause of termination. Chapter 3 is devoted to the application of multiple decrement model for evaluating the cost of a given pension plan at a specific time. Two sets of assumptions are needed to determine the actuarial present value of benefits of various types. One set is labeled as demographic, which includes the first eligible age for retirement, the mandatory age of retirement, and survival functions for retired lives, disabled lives, and lives who have withdrawn. The second set of assumptions is a set of economic assumptions, which includes assumptions about the salary scale function and about investment return or rate of interest. Illustrations, with R code, are given to compute the cost of pension plan.