Comparison of Projected Unit Credit and Entry Age Normal Methods in Sharia Pension Fund Financing using the Cox Ingersoll Ross Investment Return Model

Abstract

This research is motivated by the low level of pension fund planning in Indonesia and the importance of selecting an appropriate actuarial method to determine contributions and liabilities in a manner consistent with Sharia principles. Calculations were performed to determine normal contributions and actuarial liabilities using the Projected Unit Credit (PUC) and Entry Age Normal (EAN) methods, incorporating a discount factor derived from the Cox Ingersoll Ross (CIR) model to represent stochastic Return on Investment (RoI). The results indicate that the PUC method yields normal contributions that increase with the participant's age, whereas the EAN method produces contributions that remain relatively constant throughout the employment period. Regarding actuarial liabilities, the PUC method results in lower initial values ??that increase gradually, while the EAN method generates higher liabilities from the start of the participation period. From the participant's perspective, the EAN method is more favorable as it imposes a more stable and lighter contribution burden. Conversely, from the perspective of the company or pension fund manager, the PUC method is more advantageous due to the lower initial actuarial liability burden. Furthermore, the use of the CIR model provides a more realistic estimate of investment returns by accounting for stochastic and mean reverting characteristics, thereby resulting in more accurate calculations of the present value of pension benefits.