Pension Mathematics

Defined benefit plan valuation, funding methods, and pension risk management.

Key Concepts

• •Defined benefit plan structure: benefit formulas, retirement age, and vesting
• •Actuarial present value of pension benefits: salary projections and benefit accrual
• •Entry Age Normal (EAN) funding method: level contribution rate over career
• •Projected Unit Credit (PUC) method: accruing benefits over service period
• •Normal cost and actuarial accrued liability
• •Unfunded actuarial accrued liability (UAAL) and amortization
• •Pension risk: mortality, investment, salary growth, and turnover assumptions
• •Pension regulation: ERISA, PPA, and funding requirements
• •De-risking strategies: liability driven investing, buyouts, and buy-ins
• •Retiree health benefits: OPEB valuation and FAS 106

Study Tips

• 1.Understand the difference between EAN and PUC funding methods conceptually first.
• 2.Practice calculating normal cost and accrued liability under both methods.
• 3.Work through problems with different benefit formulas (flat dollar, career average, final average).
• 4.Pay attention to the timing of contributions and benefit payments.
• 5.Review how assumption changes affect pension liabilities.

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