Saturday, October 9, 2010

Risk premiums must be taken as earned, and never capitalized

Defined Benefit pension funds is a time bomb waiting to explode. Now a new study suggests that we don't even know how big the problem is.

Unrealistic return expectations of 8%, and an equity risk premium of 8.3%.....
If an actuary is told that the equity risk premium is 8.3% he will build it into his models and assume, come hell or high water, that stocks will earn 8.3% over bonds over the long run.

Whay about the old actuarial rule that “Risk premiums must be taken as earned, and never capitalized.”

Source: How Big Is the Pension Time Bomb?

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