This study introduces stochastic methods applied in social security pension valuation. Actuaries are well aware that they are not able to ensure and accurately forecast pension fund’s performance, which is why they incorporate prudent margins in their funding assumptions. To improve the financial sustainability in the long term, an actuarial projection of NPS is conducted every 5 years and the actuarial valuation report on the schemes has included the results from a stochastic model in addition to the results based on the deterministic valuation.
However, the methodology underlying this stochastic model is basically simulation-based. This study explores the possibility of applying other stochastic methods and suggests using income distribution and modelling the dynamics of the risk-return profiles. It is hoped that this study will help draw attention to the potential area of application of stochastic methods for the actuarial valuations of NPS and stimulate further research in that direction.