Session: 95

Pensions

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Summary

In a private retirement pension plan, one of the tasks of the actuary is to monitor that gains and losses behave within acceptable limits. The methodology for controlling gains and losses hereby presented takes some ideas proposed by the IASC and the IFAA and merge them into an optimization model. The model assumes that gains and losses [1] are stochastic processes with particular statistical properties, [2] not necessarily converge to zero nor gains are offset with losses, as is usually assumed, and [3] are controllable.

Current pension GAAP recommend the application of amortization of gains and losses as part of the Net Periodic Pension Cost. Based on the Optimal Control Theory, here we suggest the adoption of a Second Corridor such that all gains and losses above an optimal limit u must be recognized completely and immediately in the year, instead of being amortized in linear form. The Second Corridor is a mechanism to control gains and losses according to their magnitude and other relevant characteristics of each plan. This Second Corridor could also avoid the selection of deliberately biased assumptions and represents a way to avoid reductions in equity.

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