A Method of Determining the Future Trend of a Pension Fund by Means of a Series of Notional Valuations

Extract

In a recent paper to the Students' Society (J.S.S. 15, 43), D. F. Gilley and D. Funnell pointed out that it would be theoretically possible, though normally impracticable, to make a valuation of a pension fund by projecting the fund membership year by year, in order to obtain a series of notional revenue accounts for each future year of the Fund's existence, and that the algebraic sum of the discounted values of the expected future current surpluses and/or deficits would be equal to the surplus or deficiency revealed by a valuation made in the normal way.

It is frequently possible, when an estimate of the future trend of the fund is required, to reverse this process. Instead of directly estimating the future income and outgo of the fund, and so building up the expected amount of the fund year by year, we may extend the normal valuation technique, and use a series of notional valuations to determine the future trend of the Fund. In other words, the growth or decline of a pension fund between two future dates may be expressed as the difference between the net liabilities of the fund, as revealed by notional valuations, on these two dates.