Adjustable Pension Plan (APP)
Richard Hudson, Principal Consulting Actuary
CHEIRON, Inc
The General Concept
Adjustable Pension Plan (APP)
100% employer
Shared risk
Traditional DB
100% employee
Traditional DC (eg 401k)
APP
• Like a DB Plan
• Employers’ bear mortality risk, pooling reduces overall risk
• Monies pooled and managed professionally - no individual
accounts
• Unlike a DB Plan
• Investment performance/risk is shared
• Investment assumptions and strategy far less risky
• At retirement APP pension will be locked up
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The General Concept
The APP is the Greater of Two Benefits
– Floor Defined Benefit
– Adjustable Benefit
• The Adjustable Benefit Depends Upon
Actual Investment Performance
– If Above Floor Rate, the Benefit Increases
– If Below Floor Rate, the Benefit Reduces
2
Step 1: Determine the Floor Benefit Accrual
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
Floor Benefit
 Determine a contribution level (assume it’s $1/hour)
 Actuary calculates floor accrual based on:
–
–
–
–
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Demographics
A floor investment rate – 5.0%
Actuarially determined floor benefit is $600 per year of service
After 20 years of service, the projected pension at 65 is $12,000; with
30 years, $18,000; 40 years, $24,000
Step 2: Determine the Adjustable Benefit
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
Adjustable Benefit
 Benefit is annually measured as number of units times unit value
 Unit values start at $10, thereafter varies with investment returns
 Units earned each year = floor accrual ÷ unit value,
or $600 ÷ $10 =60 units in the first year
 Units accumulate each year thereafter
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3: Determine the APP Benefit
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
1
2
3
4
5
6
7
8
9
Adjustable Benefit
10 11 12 13 14 15 16 17 18 19 20
Shortfall
Floor Benefit
 The APP is the greater of the floor benefit and the adjustable benefit
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Adjustable Pension Plan
Dampens Impact of Investment Volatility
Floor Rate 5.0%
Cap Rate 10.0%
Investment Scenario
% Equity
Year
1
80%
1985
5.37%
7.70%
8.82%
6.44%
7.87%
9.82%
7.63%
5.77%
7.84%
9.52%
(5.96%)
9.88%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
$1,000
$750
$500
$250
$0
December 31,
Floor
Adjustable
Average Investment Return =
6
Assets
6.64%
Adjustable Pension Plan
• Universal
• Prices Benefits at Minimal Risk
• Risk Sharing Between Stake Holders
• High Probability of Delivering Floor Benefit
• Secure - High Probability of Being Fully Funded
• Meets Regulatory Hurdles
• Provides Adequate Benefit for Life
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