Understanding risks in a hybrid pension plan with stochastic rates of return
The solvency risk, contribution rate risk, and benefit risk of a hybrid pension plan with stochastic investment returns are studied in this project. Gaussian, autoregressive and moving average processes are used to model the rate of return. The first two moments of the funding level, the contribution rate and the benefit accrual are presented both at the stationary status and during evolution. Three investment strategies are considered and the risks generated in the hybrid pension plan are compared. Different sets of valuation rates of interest are used to understand the impact of regulative environmental change on the hybrid pension plan. The trade-off between the contribution and benefit risks and the optimum region of risk sharing are discussed to provide an insight of the relationship between plan sponsors and employees under a hybrid pension plan.