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Suppose that in a certain defined benefit pension plan

(a) Employees work for 45 years earning wages that increase at a real rate of 2%

(b) They retire with a pension equal to 70% of their final salary. This pension increases at the rate of inflation minus 1%.

(d) The pension fund’s income is invested in bonds which earn the inflation rate plus 1.5%.

Estimate the percentage of an employee’s salary that must be contributed to the pension plan if it is to remain solvent.

(Hint : Do all calculations in real rather than nominal dollars.)

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91265864

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