Stochastic modeling of economic variables for pension plan projections

Key economic variables for pension plan projections are identified. These variables are modeled based on data since 1955. Several time series models are considered including regime switching models and a simplified Wilkie Model. To investigate the dynamics of different models, simulations are carried out to project the economic series for the next 50 years using different starting values. All the models for each series are then compared using different criteria including economic theories and common actuarial practice. The best model out of the considered models for each series is selected for pension plan projections. Using actual starting values, simulation is performed again to project the economic series to model a sample defined benefit (DB) pension plan and a sample defined contribution (DC) pension plan. The total employer contributions as a percentage of wages for the DB plan, and the replacement ratio for the DC plan are studied.