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Questions and Limitations

Outstanding Questions

  • What does the 10% load for inactives mean? We’re adding 10% to the earned benefits.
  • Does the calculation of the actives liability include future salary increases? We’re assuming 3.5% salary increases until retirement because it makes the numbers look better.

Known issues/limitations

  • The discount rate and asset rate of return are the same, this overstates the beneficiaries / survivor liability and understates the actives / inactives liability.
  • Using a static 60 years to calculate the actuarial liability. In PV terms at a 5% discount rate this assumption is trivial, at much lower discount rates it will understate the actuarial liability.
  • We forecast major population segments separately – beneficiaries, survivors, tier1 and tier2 employees. But we do not forecast each participant separately.
  • We use the same mortality for all plan participants, 2/3*male mortality + 1/3*female mortality for actives and beneficiaries, 1/3*male mortality + 2/3*female mortality for survivors.
  • Our data makes annual forecasts but benefits are paid monthly. Consequently we assume all benefits accrue at the start of the forecast year, prior to mortality and retirement. Then we assume all benefits are paid at the end of the forecast year. The first assumption will overstate benefits paid, the second assume will understate the PV of benefits paid. We expect these two effects to roughly offset each other in the calculation of the Actuarial Liability.