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COURSE 8: Fall 2004 - 1 - GO TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment – U.S.
Morning Session
**BEGINNING OF EXAMINATION 8**
COMPREHENSIVE SEGMENT – U.S.
MORNING SESSION
1. (9 points) A pension committee member at your U.S. based client believes that the
interest rate for the defined benefit plan valuations is too low. He supports his view by
stating that a higher interest rate would lower the cost of the plan. A second committee
member argued against raising the assumption.
The chairman of the pension committee has asked you to lead a discussion at the next
pension committee meeting regarding the interest rate assumptions for funding purposes
and for accounting purposes, and their effect on the interested parties.
Outline your discussion.
COURSE 8: Fall 2004 - 2 - GO TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment – U.S.
Morning Session
Questions 2 – 6 pertain to the Case Study
2. (12 points) The CFO of NOC has decided to take a more active role in managing NOC’s
pension plan assets. In reviewing the performance of the National Oil Full-Time Hourly
Union Pension Plan, he is disturbed by the recent absolute performance. He proposes
that the assets should be moved to 100% domestic fixed income because that asset class
has outperformed the other asset classes in 2 of the last 3 years.
You are given:
Calendar Year Rf Rm β
2003 4% 21% 0.9
2002 5% -5% 0.85
2001 4% 1% 0.8
Additional Information for 2003
Target Portfolio Mix
for 2003 Benchmark Return in
2003
Domestic Large Cap
Equities
35% 30%
Domestic Small Cap
Equities
25% 47%
Domestic Fixed Income 25% 4%
International Equities 10% 39%
Real Estate 5% 9%
Cash 0% 1%
(a) Describe the features in a Statement of Investment Policies and Procedures that
could help the CFO in his *uation of the Plan’s performance.
(b) Calculate the 2001, 2002 & 2003 Risk Adjusted Rate of Return for the fund.
(c) Calculate the 2001, 2002 & 2003 Treynor Measure for the fund.
(d) Evaluate the investment performance of the fund during 2003.
(e) Critique the CFO’s proposal.
COURSE 8: Fall 2004 - 3 - GO TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment – U.S.
Morning Session
Questions 2 – 6 pertain to the Case Study
3. (8 points) The government of Vosne is concerned that workers are harmed by switching
companies periodically throughout their careers. The government has asked for your
assistance in understanding this issue.
(a) Describe the implications of switching employers on workers’ retirement benefits.
(b) Suggest policies that could be adopted by the government of Vosne to improve
the portability of private retirement benefits.
(c) Describe how these policies address the issues identified in (a).
(d) Describe the impact of these policies on NOC.
4. (10 points) Auditors in Vosne have criticized its current pension accounting standards as
being misleading to readers of financial statements and contrary to the teachings of
financial economics.
The Department of Accounting Standards is considering changes to the current
accounting rules to achieve the following goals:
? Increased transparency;
? Improved consistency with how financial economics measures “risk”; and
? More practical and usable information for financial statement readers.
(a) Critique the current accounting rules in light of the Department’s goals.
(b) Recommend changes to the accounting rules to meet the Department’s goals.
COURSE 8: Fall 2004 - 4 - GO TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment – U.S.
Morning Session
5. (9 points) In order to attract and retain employees in senior positions, NOC wants to
introduce terminal funding by providing the options of an insured annuity or a lump sum
benefit for the National Oil Full-Time Salaried Supplemental Retirement Plan (SRP).
The lump sum will be equivalent to the net present value of the after-tax annual SRP
benefit. The after-tax payment from the insured annuity will be equal to the after-tax
annual SRP benefit. NOC will reimburse the member for any immediate taxes payable
under both options.
You are given:
? Pat, a senior executive of NOC, will retire with an annual pension under the SRP
of $100,000.
? The before-tax discount rate used by NOC to calculate lump sum benefits is 10%.
? Lump sum annuity factors at Pat’s retirement date are:
At a discount rate of 10%: 9.5
At a discount rate of 6%: 13.5
? The cost of buying Pat’s annuity at retirement is $10 for every $1 of annual
benefit purchased.
Vosne’s tax rules for single premium annuity contracts are:
? The employer obtains a deduction for any premiums it pays;
? The executive is immediately taxed on the full purchase price of the annuity;
? A proportionate part of each annuity payment would be deemed a tax-free return
of the premium (“exclusion ratio”) and the balance is taxable at the individual tax
rate. For this purpose, a life expectancy of 20 years is used.
(a) Describe the issues that NOC must address in adopting a terminal funding
approach.
(b) Calculate the cost differential between the two terminal funding options.
Show your work.
COURSE 8: Fall 2004 - 5 - STOP
Retirement Benefits,
Comprehensive Segment – U.S.
Morning Session
Questions 2 – 6 pertain to the Case Study
6. (12 points) NOC is proposing the following changes to the Retiree Health Benefit
program of its salaried employees:
? Effective January 1, 2004, the program will be closed to new employees;
? Salaried employees with less than 20 years of service at January 1, 2004 who
do not retire before January 1, 2005 will not be eligible for the benefit after
that date; and
? For all other salaried employees, effective January 1, 2005, the portion of the
premium paid by the program will be in accordance with the following
schedule:
Years of Service at
Retirement
Plan Retiree/Spouse
20-24 50% 50%
25-29 75% 25%
30+ 100% 0%
NOC wants an analysis of the proposed changes, in respect of the following
groups of employees:
? Group A – the salaried employees who are currently eligible for the
benefits but who lose the benefits if they do not retire in the next year;
? Group B – the salaried employees other than those in Group A who are no
longer eligible to receive benefits under the program;
? Group C – the salaried employees who are eligible, under current
assumptions, to receive reduced benefits under the program; and
? Group D – the salaried employees not affected by the proposed changes.
(a) (7 points) Based on the age and service distribution of the NOC Full-Time
Salaried Pension Plan at January 1, 2004, estimate the number of salaried
employees in Groups A, B, C and D. Identify any assumptions you used
in your estimate.
(b) (3 points) Describe any special accounting treatments that are applicable
for Groups A, B, C and D.
(c) (2 points) Describe the consequences to NOC of the proposed changes.
**END OF EXAMINATION**
MORNING SESSION
COURSE 8: Fall 2004 - 6 - GO TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment – U.S.
Afternoon Session
**BEGINNING OF EXAMINATION 8**
COMPREHENSIVE SEGMENT – U.S.
AFTERNOON SESSION
Questions 7 – 9 pertain to the Case Study
7. (8 points) Your client NOC is budgeting for fiscal year 2005 in June of 2004.
They have asked you to estimate the fiscal year 2005 pension expense for the
National Oil Full-Time Hourly Union Pension Plan.
You are given (all numbers in $000’s):
Projected Benefit Obligation at January 1, 2004 with 6% discount rate = 560,919
Service Cost at January 1, 2004 with 6% discount rate = 27,169
2005 Estimated Employer Contributions = 38,000
2005 Estimated Benefit Payments = 12,100
(a) Describe the considerations for selecting the return on assets during 2004
and the discount rate for 2005 for budgeting purposes.
(b) Estimate the 2005 pension expense using a discount rate of 6% and
assuming no other gains or losses.
(c) Describe and estimate the effect of a change in the economic environment
on each component of your estimate of the 2005 pension expense.
COURSE 8: Fall 2004 - 7 - GO TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment – U.S.
Afternoon Session
8. (12 points) The Vice-President of Human Resources of NOC (VP of HR) is concerned
about the increased level and volatility of the National Oil Company Full-Time Salaried
Pension Plan costs over the past few years.
The VP of HR has proposed the following new cash balance design:
? Interest rate credit: 6% per annum
? Annual contribution credit: 5% of earnings
You are the actuary for NOC and have been hired by the VP of HR to assist with
implementing the new plan design. For purposes of this question, assume that
regulations governing pension plan benefits in Vosne are identical to those in the United
States.
(a) Identify the key plan design features that will need to be addressed in the
proposed design pertaining to retirement and ancillary benefits.
(b) Propose two options for transitioning current plan participants to the new design.
(c) Describe the effect that each of your proposed options is expected to have on the
benefits of current participants.
(d) Describe the effect that each of your proposed options is expected to have on the
2004 expense.
COURSE 8: Fall 2004 - 8 - STOP
Retirement Benefits,
Comprehensive Segment – U.S.
Afternoon Session
Questions 7 – 9 pertain to the Case Study
9. (10 points) Vosne is proposing the introduction of a defined contribution (DC) social
insurance program (SIP) effective January 1, 2004. Benefits would be funded by
employee and employer contributions, as follows:
? Employees and employers both contribute 5% of pay on earnings up to $45,000 (the
“Wage Base”).
? The Wage Base changes in line with changes in the average wage in Vosne.
? Contributions are invested at the direction of the employees by privately managed
investment companies selected by Vosne.
? Account balances are available to provide death, disability and retirement benefits.
? Account balances must be used to purchase annuities no later than age 65.
(a) Describe the challenges that other countries with DC based social insurance
systems have faced.
(b) Recommend changes to the proposed program. Justify your recommendation.
(c) In order to maintain an employee’s total benefit (DC SIP plus current plan) at a
level equivalent to that provided under the current salaried plan provisions, the
CFO of NOC is proposing to amend the National Oil Full-Time Salaried Pension
Plan benefit to 0.5% of best average earnings up to the Wage Base, plus 2.0% of
best average earnings in excess of the Wage Base.
Critique this proposal.
**END OF EXAMINATION**
高顿网校之名人警句送给考生们：人类需要善于实践的人，这种人能由他们的工作取得*5利益；但是人类也需要梦想者，这种人醉心于一种事业的大公无私的发展，因而不能注意自身的物质利益。 —— 居里夫人
高顿网校之名人警句送给考生们：人类需要善于实践的人，这种人能由他们的工作取得*5利益；但是人类也需要梦想者，这种人醉心于一种事业的大公无私的发展，因而不能注意自身的物质利益。 —— 居里夫人
