A Dissection of Pensions Funding

This paper is about actuarial methods of funding pension schemes and follows on from the report of the Working Party of the Pensions Standards Joint Committee on Terminology of Pension Funding Methods (The Terminology Report) published in 1984. It looks at the basic structure of the main methods and at how they behave. We then discuss the question of the suitability of the methods under various conditions. The reader may find it useful to have a copy of the Terminology Report to hand. The paper is written against a background of uncertainty, as regards the State Earnings-Related Pension Scheme, and of great debate and legislative activity as regards Occupational Pension Schemes. This activity and debate makes it more important than ever before that the actuarial profession explains its methods and approaches to those in the pensions industry who are not actuaries, but who nevertheless rely on actuarial advice.