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Risks 2017, 5(2), 32; doi:10.3390/risks5020032

Effects of Gainsharing Provisions on the Selection of a Discount Rate for a Defined Benefit Pension Plan

Michigan State University, 220 Trowbridge Rd, East Lansing, MI 48824, USA
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Academic Editor: Albert Cohen
Received: 21 March 2017 / Revised: 9 June 2017 / Accepted: 12 June 2017 / Published: 20 June 2017
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Abstract

This paper examines the effect of gainsharing provisions on the selection of a discount rate for a defined benefit pension plan. The paper uses a traditional actuarial approach of discounting liabilities using the expected return of the associated pension fund. A stochastic Excel model was developed to simulate the effect of varying investment returns on a pension fund with four asset classes. Lognormal distributions were fitted to historical returns of two of the asset classes; large company stocks and long-term government bonds. A third lognormal distribution was designed to represent the investment returns of alternative investments, such as real estate and private equity. The fourth asset class represented short term cash investments and that return was held constant. The following variables were analyzed to determine their relative impact of gainsharing on the selection of a discount rate: hurdle rate, percentage of gainsharing, actuarial asset method smoothing period, and variations in asset allocation. A 50% gainsharing feature can reduce the discount rate for a defined benefit pension plan from 0.5% to more than 2.5%, depending on the gainsharing design and asset allocation. View Full-Text
Keywords: gainsharing; pension; discount rate; hurdle rate; asset smoothing; asset allocation gainsharing; pension; discount rate; hurdle rate; asset smoothing; asset allocation
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

Rietz, R.J.; Cronick, E.; Mathers, S.; Pollie, M. Effects of Gainsharing Provisions on the Selection of a Discount Rate for a Defined Benefit Pension Plan. Risks 2017, 5, 32.

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