Overall, the data Smith has gathered so far indicate an average tolerance for risk. The plan surplus indicates that the present value of plan liabilities is more than covered by the present value of plan assets. Pension plans with restrictive plan features, such as no early retirement or lump-sum distribution provisions increases the duration of the liabilities which, in turn, allows for a higher risk tolerance. The workforce is young; a high active to retired lives ratio indicates a large portion of the workforce is still working while only a small portion of beneficiaries is receiving plan benefit payments. All of these factors indicate an above-average ability to take risk. However, if the Pension Committee were to decrease the discount rate, the PBO would rise and the surplus could disappear. Also, a spike in commodity prices (silver required and only one supplier) and/or the cyclicality of the auto industry could adversely affect Branch’s sales and profit margins. Hence, Branch’s ability to make contributions if the economy slumps, could be compromised. In addition, Branch is more heavily leveraged than its competitors. This could also impact its ability to make timely contributions in an economic downturn. These factors imply less ability to take risk, especially in light of the Pension Committee’s expressed desire to control the volatility of contributions |
