journal of pension planning & compliance - Kluwer Law International

4 / JOURNAL OF PENSION PLANNING & COMPLIANCE
THE SIMULATION MODEL
In order to assess the magnitude of obligations facing pension
plans under the prevailing circumstances, a simulation of a prototype
pension plan was constructed to consider the impact of economic conditions
as well as financial factors on the ability of a pension plan to
meet its obligations.
Consider a prototype pension plan that covers 1,000 employees. The
age distribution of the employees reflects the current age distribution of
the civilian noninstitutional labor force (BLS 2010) where it is reported
that 55.6% of employees are under 45 years of age, 34.4% are between
45 and 59 years, and 10.5% are 60 years of age or older. Assume that
all employees are vested and that employees under age 45 have a vested
benefit of $1,000 per month or $12,000 per year beginning at age 65;
employees between an age of 45 and 60 have a vested pension benefit of
$1,500 per month or $18,000 per year beginning at age 65; and employees
over age 60 have a vested pension benefit of $2,000 per month or $24,000
per year. These stipulations are summarized in Table 1 below:
Table 1. Properties of the Prototype
Pension Plan Simulation
Employee Age
Number of
Employees
Vested Monthly
Pension Benefit
20–under 45 years 556 $1,000
45–under 60 years 344 $1,500
60 years and over 105 $2,000
No provision has been made in the simulation to distinguish the
workforce by gender or race, and it is recognized that the distribution of
the age of covered employees in most large industrialized pension plans
may not reflect the age distribution of the workforce. Furthermore, it is
assumed that all employees would retire at exactly age 65.
There are several standard models that are generally accepted to
evaluate group pension obligations. The application depends on the
quality and availability of data. The most appropriate model considers
the expected present value (EPV) of the aggregate pension contract
commitments. This model will be applied in this simulation. Simply
stated, the model is as follows:
p m A
EPV i ∑ (1) i