Understanding risks in a hybrid pension plan with stochastic rates of return

The solvency risk, contribution rate risk, and benet 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 rst two moments of the funding level, the contribution rate and the benet payment 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. Dierent sets of valuation rates of interest are used to understand the impact of regulative environmental change on the hybrid pension plan. The trade-o between the contribution and benet 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.