The Proficient Instrument—A New Appraisal of the Commutation Function in the Context of Pension Fund Work

Extract

In this paper, we aim to demonstrate the continuing usefulness, despite many recent attacks, of the commutation function in pension fund work. To do this we take the offensive and show how the range of the function can be extended to provide factors suitable for the N-Year discontinuance valuation. In such a valuation, by contrast to the more usual aggregate method, it is assumed that the fund will be voluntarily wound up after the passage of the given period of years. The normal result of such a step will be to slacken the recommended pace of funding, at least in the immediately future years.

What may be said to be the point of so doing? By having at his fingertips N-year as well as aggregate-type functions, the actuary will add a further dimension to his possible choice of valuation basis. The dimension may be thought of as his ‘horizon’ on those future events which affect the payment of benefit under the Scheme. The use of such an horizon as an element of the basis is likely to have particular relevance in an era of high inflation and negative real returns on fund investments.