Article From:

The Actuary
October 1985 – Volume No. 19, Issue No. 8
Page Six THE ACTUARY October, 1985

PENSIONMATHEMATICS The first chapter introduces the na- the Social-Security-Adjustment option,
FORACTUARIES ture of the subject and rhe purpose of joint and survivor option, etc.
Arthur W. Anderson the book. It significantly discusses the Chapter 5 discusses the valuation of
Author and Publisher difference between the philosophy and assets. A smoothed market value is ra-
Reviewed by Deborah Poppel application of actuarial mathematics in tionalized for stocks. The new-money
the pension field versus the life in- approach to valuing bonds is explained
Arthur Anderson has written a book surance field. clearly. Some interesting problems arise
on the subject of Pension Mathemarics The next two chapters develop, from in the valuation of assets for plans fund-
which can be easily followecl by a reader reasonable premises, the formulas for ed by group annuity contracts or in-
who understands life contingencies, normal cost and accrued liablity for the dividual insurance policies.
elementary calculus, and algebra. He following methods: unit credit, entry The chapter on actuarial assumptions
has used an informal style of writing age normal, individual level premium, contains some surprises (at least to this
(“We” are talking to “you”). The frozen initial liability and the aggregate reader). Anderson develops the concept
definitions and concepts are surrounded methods. Included is a clear insight into that, under certain conditions (small
by conversation, which makes them the formula for actuarial gains which plans or small probabilities of decre-
more meaningful than the usual concise enables the reader to observe an analysis ment), more accurate results are ob-
statements one would expect in such a of these gains from various sources. tained by ignoring a decrement than by
book. He has taken pains to organize Both contributory and non-contribu- using a precise measure of it. Anderson
the subject in an order which makes the tory plans are discussed. is concerned with portraying the nature
principles easily grasped. The formulas are expressed in terms and significance of the various assump-
The book contains seven chapters, of commutation symbols. Other writers tions rather than the actual choice of
each of which is divided into sections of have used summations of probabilities them.
three to seven pages. Each section is (Winklevoss), annuity symbols (Trow- The final chapter begins by dealing
followed by exercises which are well- bridge and Farr), or words (McGill). A with the question as to who should be
designed to keep the reader involved in mixture of commutation symbols, included in a pension valuation. Follow-
the evolution of the subject. Some of probabilities, and the spreadsheet con- ing this, Anderson gives variations of
the exercises prove mathematical rela- cept was used by another author both the unit credit method (projected
tionships which were glossed over in the (Berin). There is some feeling in ac- unit credit, etc.) and the individual level n
preceding section. Others lead to tuarial circles that computers have premium method (individual-aggregate, _
development of new but related eliminated the need for commutation etc.) Some of these methods may not be
material. Hints are provided to lead the symbols. However, commutation sym- permitted for plans subject to ERISA.
reader through new topics. bols can be used for conceptual model Anderson has provided an exposition
Occasionally, one might wish for building as illustrated by Anderson. The of pension mathematics in a manner
more hints than are given. A criticism of ideas could have been handled with which gives the reader a very complete
the text might be that there are not probabilities just as easily as with grasp of the subject. His rationaliza-
enough questions of the reinforcement commutation symbols. Anderson chose tions are extremely thorough. This book
type. Formulas can be interpreted as in- commutation symbols. It should make will become one of the classics of ac-
structions for processing data and ac- no difference to an actuary whether tuarial literature.
ideas are expressed in commutation References
tuarial functions. Does the reader really
know how to execute these instructions? symbols or as summation of prob- I. Berin, Uarnel N. (1978) The Fur~d;~mer~~a/s ol‘
Some problems testing this ability abilities. Actual computation can be Pension Marhemarics, William M. Mercer, Inc.
would be useful. Anderson does not, handled by any state-of-the-art method. 2. McGill, Dan M. (1984) Furldnrnerlrab ol
The fourth chapter gives formulas for Private Pemiom. Richard D. Irwin, Inc.
and did not intend to, provide exercises
3. Trowbridge, C.L. and Farr, C.E. (1976) The
which develop problem solving skills ancillary benefits: vesting, early retire- Theory and Pracricc of‘ Pcmion Fllnding,
needed to pass professional or licensing ment, late retirement. In the exercises Richard D. Irwin, Inc.
examinations. -the reader is led to produce formulas for 4. Winklcvoss, Howard E. (1977) Perlsiorl
.Marhernarics. Richard D. Irwin, Inc.

Editor’s Note: The Anderson book, pp.

Some Magic Numbers GXGWI /iorll p36cs) 175, is available from Windsor Press,
Wellesley Hills, MA 02181, $49.
(8) What is the monthly payment for a 240-month mortgage with a I% monthly
interest rate?
COMPETITIONRESULTS
Ans: MN (1 +k)/k = 240. MN10 = 72 + 167 = 239. Hence (I + k)/k = IO, by Charles G. Groeschell,
k = l/9, and (l+k).i 2 1.11%.
f---l
Competition Editor
-I
Conclusion Esther Portnoy and Robert Hohertz
Those who like to solve problems involving exponential growth at a constant rate, continue to solve all Actucrossword
without use of interest tables, logarithms, or calculators, will find much of value in puzzles with apparent ease. They re-
the three magic numbers 72, 114, and 167. Learn to use them, and amaze your main our co-champions with ten 100%
friends! cl (Continued on page 7)