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Exponential smoothing methods in pension funding

Owadally, M. I and Haberman, S. (2003). Exponential smoothing methods in pension funding. IMA Journal of Management Mathematics, 14(2), pp. 129-143. doi: 10.1093/imaman/14.2.129

Abstract

'Smoothed-market' methods are used by actuaries, when they value pension plan assets, in order to dampen the volatility in contribution rates recommended to plan sponsors. A method involving exponential smoothing is considered. The dynamics of the pension funding process is investigated in the context of a simple model where asset gains and losses emerge as a result of random rates of investment return and where the gains and losses are spread. It is shown that smoothing market values up to a point does improve the stability of contributions but excessive smoothing is inefficient. It is also shown that consideration should be given to the combined effect of the asset valuation and gain and loss adjustment methods. Practical and efficient combinations of gain/loss spreading periods and asset value smoothing parameters are suggested.

Publication Type: Article
Additional Information: This is a pre-copyedited, author-produced PDF of an article accepted for publication in IMA Journal of Management Mathematics following peer review. The version of record Owadally, M. I & Haberman, S. (2003). Exponential smoothing methods in pension funding. IMA Journal of Management Mathematics, 14(2), pp. 129-143 is available online at: http://dx.doi.org/10.1093/imaman/14.2.129
Publisher Keywords: actuarial valuation; pension funding; asset value; smoothing
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Actuarial Science & Insurance
URI: http://openaccess.city.ac.uk/id/eprint/14283
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