Current valuation and funding approaches for Cash Balance (CB) pension plans are derived from the traditional defined benefit methodology, and are not very well suited to the Cash Balance format. Murphy (2001) demonstrates the Entry Age Normal, Projected Unit Credit and Traditional Unit Credit valuation approaches, and shows that, with some reasonable assumptions, and a realistic valuation basis, the accrued liability valuation may be less than the hypothetical account value.  This result is clearly inconsistent with financial valuation principles, or with prudence in accounting.

Gold (2000) analyzes the CB design from a  corporate finance perspective, considering the risk and return to the shareholders of the sponsoring company. Our objective is quite different, though also utilizing financial theory. We consider the CB benefit  as a financial liability, which can be analyzed using the models and paradigms of financial economics and risk management.   We will investigate the financial risks inherent in different CB benefit designs, and we derive funding and risk management techniques that would address the financial risks. Throughout, we consider valuation, funding and risk management holistically. We will demonstrate the advantages and disadvantages of applying modern methods of financial engineering to  CB plan design and management.

References:

Gold J.  (2000) Shareholder-Optimal Design of Cash Balance Pension Plans. Pension Research Council Working Paper, The Wharton School, University of Pennsylvania.

Murphy (2001) The Cash Balance Funding Method. In Cash Balance Symposium Monograph. Published by the Society of Actuaries, Schaumburg, Il.