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Discussion Paper: Geometric Averaging Investment Scenarios

Geometric Averaging example (26 KB)

The above six examples illustrate the difference between arithmetic and geometric averaging for purposes of determining pension increases under the "excess interest" approach.

Actual investment returns are used for Plan years ending August 31, 2002 (-1.9%), August 31, 2003 (9.1%) and August 31, 2004 (11.7%).

Each of the examples shows a different pattern of future investment returns. To simplify the comparison, the examples assume 4-year averaging of returns.

The last three examples show what happens when the excess interest is negative. Pensions in payment are not reduced, but future increases are based on the "true" monthly pension.

In each example, the percentage shown at the right hand side of the figures for the year 2011 shows the pension paid using the geometric average as a percentage of the pension paid using the arithmetic average — so in example #1, the pension paid in 2011 under the geometric average would be 99.67% of the pension paid under the current arithmetic average.

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