In the context of DB pension plan, how is the duration of liability determined?
DUR of liability = DUR of PBO DUR of PBO = change of PV of PBO to change of interest rate ?
I am more interested in understanding what parameters to use during comparing one pension plan’s liability’ duration with another…
Sorry, I confused myself. DUR of liability = DUR of PBO PV of PBO = B/(1+r) B = benefit R = discount rate used for PBO (not interest rate). This discount rate should reflect the market related exposure e.g. If there is Inflation, we need inflation premium on the discount rate. Factors affect the DUR incl 1) active lives to retired lives. Active lives = avg years to retirement. Retired live = avg life expectation. 2) Plan characteristics e.g. early retirement provison.
How does early retirement option (e.g. lump-sum) affect the duration?
If your company suddenly adjust people’s retirement age from 60 to 40. More people now allowed to retire. You pay benefit sooner than it was before. The DUR on active lives (avg years to retirement ) shorten