7 Dedicated Bond Portfolios - A Case Study

7 Dedicated Bond Portfolios - A Case Study - ACTSC 445:...

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ACTSC 445: Asset-Liability Management – Fall 2008 Department of Statistics and Actuarial Science, University of Waterloo Unit 7 – Dedicated Bond Portfolio: A Case Study References (recommended readings): Chap. 48 of Fabozzi. In this unit, we use an example based on a pension plan to illustrate the use of a dedicated bond portfolio for cash flow matching. The liabilities in this example are taken to be the expected benefit payouts to a closed block of current retirees, and a 35-year schedule is used. A few notes on liabilities: Liability obligations must be projected accurately. Sometimes, terminated vested participants (former employees who are vested in the pension plan and are entitled to benefit payouts commencing sometime in the future) are also included, and also active partcipants over the age of 50. When this is the case, various mortality, termination, and benefit assumptions must be reviewed periodically. The following table is an excerpt of the schedule of expected benefit payouts for this example (Exhibit 48-1 in Fabozzi). Retired lives liabilities Retired lives liabilities plus terminated vested Year Dollar Payout Dollar Payout 1992 1,250,000 2,000,000 1993 15,000,000 24,000,000 1994 14,916,015 24,519,000 1995 13,445,985 25,021,000
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7 Dedicated Bond Portfolios - A Case Study - ACTSC 445:...

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