Bonus, Salary Increases and Real Value of Pensions

We consider a pension scheme with a given payment combination based on the money purchase system. The contributions to the pension scheme are typically fixed as a certain percentage of the actual salary and the contributions are used for the purchase of benefits. Bonus is used for the current purchase of supplementary insurance with the same payment combination as for the policy. We describe how the nominal value of the pension cover level increases because of continuous bonus and salary increases. We find that the equivalence principle holds for the actual premium and pension payments under natural assumptions. New versions of Thiele's differential equation are derived and new insight is gained into the financing of the pension benefits. Finally we examine how the real value of the pension cover level depends on both the real interest rate and the basic interest rate.