Market consistent valuation and funding for cash balance pension liabilities
Cash balance pension benefits are accumulated at guaranteed crediting rates, usually based on yields on government securities. Viewed as a financial liability, the benefit is a form of interest rate derivative, which can be valued using financial models and theory. We derive the market value for a range of commonly used crediting rates, assuming the accrued benefit liability comprises the past contributions, allowing for full interest credits up to a known future retirement date. We explore the risks associated with different crediting rate choices by evaluating the liability using market data from 1998 to 2013.
We propose two alternative approaches to the accrued benefit. The first approach assumes the accrued benefit comprises past contributions with interest up to the valuation date, but no future interest credits. Future credits on past contributions are assumed funded through future contributions. The second method projects all contributions and interest to retirement, and assumes equal units of accrual of this projected benefit in each year of service. We compare the three approaches through numerical examples.