Issue in pension plan model and revision recommend

Discussed below is an analysis of some of the limitations in the current model and viable revision recommendations.

Assumptions – A crucial part of the decrement assumptions made in the model is outdated, and there is a need to link up with the trending experience. This calls for careful review and update of the assumptions and input on annual base by studying a company’s historical data to echo a realistic situation as well the policyholder’s behavior. For affirm grasp of appropriateness and materiality of each assumption; conduction of sensitive testing through secondary models is suggested. Besides, the model should consider mortality improvement and adjust the set up accordingly.

Reporting Delay ­–The delays in filing monthly reports occurs mainly due to the unpredictable timing of data achievement from the third party and the cumbersome importing process. To avoid this in future prior communications with the third-party or should be done to ensure that data is received in time. Also, to ascertain that in-house projected rates are available when needed a secondary model to project market return and discount rate should be developed. On the other hand, automation of data importing process should be implemented with urgency to improve efficiency. Automation of the process can be boosted further by communicating with the third-party vendor when the data structure changes. In addition, transferring the model Excel into professional actuarial software can speed up calculation process and valuation efficiency since Excel is limited in terms of data and size.

Benchmark –Cases of dents were noted in the experience during benchmarking, and relevant true-ups were required. This may due to inaccurate asset return projection from the model. To rectify this, check with the third-party vendor that the weighted average return rate is calculated on ABCs reliable investment portfolio basis. For a more accurate projection either adjust the model or build a secondary model to breakdown total asset into a single investment fund in the portfolio from the model. If this is the case, a valuation team should request a projected return for each investment fund from the third-party vendor.

Stochastic Projection – For a more accurate and robust modeling result, stochastic projection can be implemented to estimate liability and asset cash flow. Incorporating random fluctuations into survival function and market return can be used to calculate liability and asset cash flow and 1000 scenarios would be generated. Therefore, a suitable estimated contribution amount can be calculated by averaging or using more advanced statistical technique. The discreet analysis will be a necessity to implement the randomness into survival function. Finally, thorough communication with the third-party vendor should be done to achieve 1000 stochastic market return scenarios.

Sensitivity Testing – Current modeling process lacks sensitivity testing. However, sensitivity testing can be of great importance in updating liability and can help the management team make better funding decisions. This will not only ensure an economical, sensible and well-funded plan but also it will cater to the regulators’ solvency requirements. Also, the adoption of a sensitive test multiplier on each assumption made in the model should be set in place. Further scenarios can be designed to test extreme cases that might arise from external forces and relevant actions taken. In conclusion, if the reporting timeline is permitted, conducting sensitivity testing on a monthly or quarterly basis would be recommended to ensure efficiency.

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