Jun 1, 1982
Journal of Risk and Insurance
This study investigates the long-run pension plan cost risk associated with adverse inflation rate, salary growth rate, and investment return experience. Risk, which is measured by the likely deviation of pension cost from the expected pension cost, is calculated from simulated probability distributions of pension cost. The results are tested for sensitivity to the expected inflation rate assumption, the asset mix assumption, and postretirement cost-of-living provisions. The investigations indicate significant potential for adverse cost experience. Pension planning based on deterministic or expected actuarial outcomes may seriously underestimate pension cost and lead to harmful decisions resulting in funding problems and financially burdensome benefits.