Multiple technical interest rates: A contribution to strengthening the stability of pension system

Abstract

In actuarial science relative to pensions and life annuities, it is a common assumption that the discount rate used to calculate the adequate reserve amount to cover future payments is equal to the expected long-term return rate of portfolios in which is invest. That assumption is inconvenient because it could lead fund managers take an excess risk in order to have greater profitability and ignore that each future cash flow should have a discount rate according with their pay date. This article demonstrates the existence of a suitable technical interest rate to discount each future payment, however these rates are not necessarily equal among them and the expected long-term return of the portfolio. In order to estimate those technical interest rates, it's proposed to apply a risk model in each of the expected payments, which incorporates the fluctuations of the portfolio in which the actuarial reserves are inverted. Calculate adequate discount rates to determine actuarial reserves contributes to strengthening the stability of pension systems and the financial system in general.