Question
Your company offers a denied-benefit pension plan to each of its employees. The plan will make a monthly payment to each retiree of $4 thousand,
Your company offers a denied-benefit pension plan to each of its employees. The plan will make a monthly payment to each retiree of $4 thousand, next month. In each subsequent month, the payment will grow by an annualized rate of 2% to adjust for inflation. There are currently 100 retirees, and you estimate that this number will remain the same, indefinitely. The government mandates that (i) pension liabilities must be discounted at an annualized rate of 4%, and (ii) pension liabilities must be 75% funded (that is, the pension fund must be funded at 75% of the present value of the liabilities). (a) How much money must your rm contribute to its pension fund. (b) Consider the following variation on (a). Yours is a young company { a sexy startup. You don't have any retirees right now, but you do make pension promises to your young workers. You estimate that 20 years from now the first cohort of 50 workers will retire, receiving their first monthly payment one month after retiring (received in 241 months). Going forward, you expect the pool of retirees to remain stable, at 50. How much money must your firm contribute now in order to fulfil the government mandate?
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