A pricing model for a defined contribution unit-linked retirement benefits provident plan

Abstract

The major objective of this study was to design a pricing model for a Defined Contribution Unit-Linked Retirement Benefits Provident Plan for lives aged 35 years to 50 years of age. Other specific objectives related to this study were to design a product that achieves a profit margin greater than five percent after 10 years as well as to carry out a sensitivity analysis that will determine the extent of change in the profit margin given a change in the key assumptions. The key assumptions made in this study were as follows: Risk discount rate of 16.38% per annum; Interest rate of 10.0% per annum; Unit Fund Growth rate of 5.0% per annum. Other assumptions include an Inflation rate of 10.4% and mortality rates from the Uganda Mortality Tables. The results of the profit test show that this product is profitable with terms greater than 10 years for both genders. The profit margins ranged from 4.41% to 8.15% for males and from 4.45% to 8.18% for females. The premiums ranged from UGX 1,175,460 to UGX 1,287,240 over al terms and ages for males and from UGX 1,187,010 to UGX 1,291,930 for females. Results from the sensitivity analysis show that risk discount rate, commission and expenses are the most sensitive assumptions. They should be monitored regularly and re-pricing done if they exceed the acceptable range. Profitability declined with increase in age for both males and females.