HOW much does it cost to fund a traditional final salary pension? A lot. OECD tables show that 65 year-old men can expect to live for 19 to 21 years after retirement, while women may manage 22 to 28 years. The traditional UK schemes paid a sixtieth of salary for every year of employment, up to a maximum of 40 years, or two-thirds of final salary. US schemes were the same, with the important exception that full inflation-linking was rarely guaranteed.

 

There are really three ways of costing this. The first, practiced by US public sector pension funds, is to discount the liabilities by the assumed rate of return on the fund. This is subject to all manner of criticisms; first, it encourages overoptimism, second, expected returns are unlikely to match assumptions, third, no other liability (tax, debts to…Continue reading