Solvency capital, inflation and time horizon in pension liabilities

Risk measurement as applicable for insurers (Solvency 2) or banks (Basel 2) can also be considered for pension fund liabilities. The purpose of this paper is to present various stochastic models in continuous time in order to estimate solvency capital for two important risks faced by pension funds: market risk and inflation risk. We address the situation of a Defined Benefit Pension Scheme (DB) with liabilities linked to final salary. We try to develop in this context a methodology coherent with IAS norms based on the so called projected unit credit cost method but including a risk measure approach. We also show that pension portability could be modeled using classical ruin theory.