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Pension funds

A company sets up a pension fund for its employees. Its aim is to pay out £1,500 monthly to each pensioner over his / her remaining lifetime. The actuary assumes that employees retire at the age of 65 and have a life expectancy of 20 more years after that. The company wishes to set aside a certain amount of money P for each pensioner such that the pension payments can be fully funded out of the interest earned on P and by using up the capital P over the remaining expected lifetime of each pensioner (i.e., the company wants to have paid out P to the pensioner over the 20 year horizon). The actuary believes that the company can achieve a 6% annual return over the 20 year horizon.

a. How much money does the company need to have set aside for each employee when they retire?
b. A new study suggests that life expectancy has increased by 5 years. Calculate by how much the pension fund is underfunded if this prediction is correct? Similarly, what is the amount of underfunding if the company only manages to earn 5% annually on its investment?

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A company sets up a pension fund for its employees. Its aim is to pay out £1,500 monthly to each pensioner over his / her remaining lifetime. The actuary assumes that employees retire at the age of 65 and have a life expectancy of 20 more years after that. The company wishes to set aside a certain amount of money P for each pensioner such that the pension payments can be fully funded out ...

Solution Summary

How much money does the company need to have set aside for each employee when they retire?

$2.19