Dynamics Simulation Approach in Analyzing Pension Expenditure

Salary risk and demographic risk have been identified as main risks in analyzing pension expenditure particularly in Defined Benefit pension plan. Therefore, public pension plan in Malaysia is studied to analyze pension expenditure due to salary and demographic risk. Through the literature review and interview session with several officers in public sector, factors affecting pension expenditure are determined. Then, the inter-relationships between these factors are analyzed through causal loop diagram. The System Dynamics model is later developed using iThink software to show how demographic and salary changes affect the pension expenditure. Then, by using actual data, the impact of different policy scenarios on pension expenditure is analyzed. It is shown that dynamics simulation model of pension expenditure is useful to evaluate the impact of changes and policy decisions on risk particularly involving demographic and salary risk.

Authors:

• Hasimah Sapiri
• Anton Abdulbasah Kamil
• Razman Mat Tahar
• Hanafi Tumin

Keywords:

• Demographic and Salary risk
• Pension Expenditure
• Public Policy
• System Dynamics.

References:

[1] Disney, R. and Johnson, P., Pension systems & retirement incomes
across OECD countries, Edward Elgar, 2001, pp. 1-3.
[2] Chang, K.W., "A risk management perspective on public pension
reform," PhD diss., Boston University, 2000.
[3] Maani, K.E & Cavana, R.Y. Systems Thinking and Modeling,
Understanding Change and Complexity, Pearson Education N.Z press,
2000, pp. 16-70.
[4] Chang, S.C., "Optimal pension funding through dynamic simulation: the
case of Taiwan public employees retirement system," Insurance,
Mathematics & Economics, vol. 24, pp. 187-199,1999.
[5] Chang, S.C and Cheng, Y.H., "Pension valuation under uncertainties:
implementation of a stochastic & dynamic monitoring system," The
Journal of Risk & Insurance,vol. 69, pp. 171- 192, 2002.
[6] Chaim, R. M., "Combining ALM and System Dynamics in Pension
Funds," in online Proc. of the 24th International Refereed Conference of
System Dynamics Society, Netherlands, 2006.
[7] Chaim, R. M., "Dynamic stochasticity in the control of liquidity in asset
and liability management (ALM) for pension funds," in online Proc. of
the 25th International Refereed Conference of System Dynamics Society,
Boston,2007.
[8] Jimeno, J.F., Rojas, J.A. and Puente, S., "Modelling the impact of aging
on social security expenditures," Economic Modelling, vol. 25, 2008, pp.
201-224.
[9] Shimada, T, Kameyama, S, Uchino, A, Machida, K and Watanabe, M,
"Simulation model of Japanese welfare annuity system," in online Proc.
of the 8th International Refereed Conference of System Dynamics
Society, Chestnut Hill, USA, 1990.
[10] Chaim, R. and Streit, R.E. "Pension funds governance: combining SD,
Agent based modeling and fuzzy logic to address Dynamic Asset and
Liability Management (ALM) problem," in online Proc. of the 26th
International Refereed Conference of System Dynamics, Society,
Athens, 2008.