[smoothfunding] [pricing_approach]

There are two approaches, labelled “MtM” and “Off”, respectively corresponding to “mark to market” and “off market” (the latter formerly called smoothing).

MtM Assumption  For fixed benefits, the discount rate is the yield on long-term conventional gilts. For index-linked benefits, the yield on index-linked gilts is used for the “blend” period alone. Otherwise, it is the conventional gilt yield, adjusted to allow for the same long-term rate of inflation as for off-market. While simplistic, it is not only simple but also not that far away from what broadly tends to have been assumed.

Off Assumption  For equities and bonds, the expected return is estimated as a multiple of the initial yield. Using random numbers and past experience, the multiples have been set separately for each of the 4 experiences (see table below). Although these are based upon past actual experience means, we don’t actually need to use scalars. However, I have done so because I thought that the random numbers were excessively volatile. The historical results are charted here.