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IMA Journal of Management Mathematics 2003 14(2):129-143; doi:10.1093/imaman/14.2.129
© 2003 by Institute of Mathematics and its Applications
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Exponential smoothing methods in pension funding

M. Iqbal Owadally1 and Steven Haberman1

1 Cass Business School, City University, 106 Bunhill Row, London EC1Y 8TZ, UK

‘Smoothed-market’ methods are used by actuaries, when they value pension plan assets, in order to dampen the volatility in contribution rates recommended to plan sponsors. A method involving exponential smoothing is considered. The dynamics of the pension funding process is investigated in the context of a simple model where asset gains and losses emerge as a result of random rates of investment return and where the gains and losses are spread. It is shown that smoothing market values up to a point does improve the stability of contributions but excessive smoothing is inefficient. It is also shown that consideration should be given to the combined effect of the asset valuation and gain and loss adjustment methods. Practical and efficient combinations of gain/loss spreading periods and asset value smoothing parameters are suggested.

Keywords: actuarial valuation; pension funding; asset value; smoothing

Received 3 June 2003. Revised 8 August 2003.


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