COURSE 8: Fall 2003 -1- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Morning Session
    Society of Actuaries Course 8RU Fall 2003
    **BEGINNING OF EXAMINATION 8**
    COMPREHENSIVE SEGMENT – U.S.
    MORNING SESSION
    All Questions pertain to the Case Study
    1. (7 points) A NOC executive with 30 years of service plans to retire one year from now at
    age 62. It is important to NOC that the executive transitions to retirement over the next
    four years.
    (a) Describe the benefit incentives that can be offered to help retain this executive.
    (b) If you were hired by this executive, provide your recommendation regarding the
    negotiation of benefits.
    (c) Explain how your answer to (a) would be different if the executive had only eight
    years of service with NOC.
    (d) Identify the additional considerations that would exist if, instead of being hired by
    the executive, you were hired by NOC to provide advice to the executive.
    COURSE 8: Fall 2003 -2- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Morning Session
    All Questions pertain to the Case Study
    2. (11 points) On June 30, 2003, NOC purchased a non-participating annuity contract to
    cover the obligations of all the pensioners in the Full-Time Hourly Union Pension Plan.
    You are given:
    •The contract cost was $125 million.
    •As of June 30, 2003, NOC has recorded half of its 2003 pension expense and
    contributed half of its 2003 contribution.
    •A discount rate of 6.0% was appropriate on June 30, 2003.
    •Valuation results as of June 30, 2003, immediately before the annuity purchase:
    Using a 6.5%
    Discount Rate
    Using a 6.0%
    Discount Rate
    (All dollars in 000’s)
    PBO
    Active participants $377,000 $400,000
    Deferred vested participants 0 0
    Pensioners 103,000 108,000
    Total PBO $480,000 $508,000
    Service Cost $24,000 $28,000
    Market value of assets $320,000 $320,000
    Average remaining service period 11.5 11.5
    (a) (5 points) Calculate the pension expense for the year 2003. Show all work.
    (b) (1 point) Describe the additional considerations if a participating annuity contract
    were purchased.
    (c) (3 points) Explain how your answer to (a) would differ under IAS 19 and the
    rationale for the different requirements.
    (d) (2 points) Describe the information NOC will have to provide the insurer for the
    purpose of obtaining a quote for the annuity contract.
    COURSE 8: Fall 2003 -3- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Morning Session
    All Questions pertain to the Case Study
    3. (6 points) NOC’s Board of Directors has established the following funding policy for
    NOC’s DB ERPs: annual contributions equal to normal cost plus five-year amortization
    of unfunded actuarial accrued liability. The CFO of NOC is concerned about the
    volatility of funding policy contributions.
    (a) Explain the effects of different asset valuation methods on this volatility.
    (b) Explain the effects of different asset class allocations on this volatility.
    COURSE 8: Fall 2003 -4- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Morning Session
    All Questions pertain to the Case Study
    4. (12 points) The law in Vosne has been changed to permit voluntary employee
    contributions of up to 5% of pay to a DC ERP. The tax treatment of these contributions
    is the same as for contributions to a PPA.
    NOC has decided to change the Full- Time Hourly Union Pension Plan from a flat dollar
    plan to a final average earnings plan, and to add a DC ERP for the union employees.
    The main provisions of the new plans are:
    DB ERP
    Normal retirement benefit: 1% of final five-year average earnings
    times years of service
    Post retirement indexing: 3% per year
    Optional form of benefit: Lump Sum
    The other provisions of the plan are the same as those in the NOC Full-Time Hourly
    Union Pension Plan.
    DC ERP
    Employee Contributions: Voluntary
    Matching Employer contributions: 100% match on the first 3% of employee
    contributions
    Form of Benefit: Lump sum or periodic pension
    (a) Critique the design of the new plans from the perspective of NOC.
    (b) Critique the design of the new plans from the perspective of the hourly union
    employees.
    (c) Assess the current hourly plan asset allocation for the new DB plan.
    (d) Describe the considerations in setting investment options to be offered to
    participants in the DC ERP.
    (e) Predict the socio-economic effects of the change in the law in Vosne.
    COURSE 8: Fall 2003 -5- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Morning Session
    All Questions pertain to the Case Study5. (6 points) NOC has just established a global subsidiary. Employees of the subsidiary
    include transferred NOC employees and third-country nationals.
    (a) Explain the issues affecting a retirement benefit policy for permanent and
    temporary transfers between countries.
    (b) Assuming that global comparability of retirement benefits is a corporate
    objective, describe the issues NOC must consider.
    COURSE 8: Fall 2003 -6- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Morning Session
    All Questions pertain to the Case Study
    6. (10 points) NOC’s CEO has proposed an asset mix policy for the Full-Time Hourly
    Union Pension Plan to achieve the following objectives:
    •Minimize short-term volatility of the company’s pension expense.
    •Minimize the long-term cost of the plan.
    Proposed Asset Mix Policy
    Domestic Equities (mostly oil companies) 60%
    International Equities 5%
    Domestic Fixed Income (short & medium-term
    treasuries)
    20%
    Real Estate 15%
    (a) Critique the proposed asset mix policy.
    (b) You are going to perform an asset liability study for the NOC Full-Time Hourly
    Union Pension Plan. Describe the inputs you would need and the process you
    would undertake.
    (c) Explain how the output of your asset liability study would be used to recommend
    and justify an asset mix policy to the CEO.
    COURSE 8: Fall 2003 -7- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Afternoon Session
    All Questions pertain to the Case Study
    7. (8 points) NOC is acquiring TechCo, a private company in the country of Xanadu.
    Xanadu has similar tax and pension legislation rules to Vosne, with the following
    exceptions:
    •Employees can contribute up to $5,000 per year to a DB ERP and $5,000 per year to
    a DC ERP.
    •Employee contributions are tax-deductible to the individual.
    •Investment earnings on the employee contributions are not taxable until withdrawn.
    •There are no PPAs.
    Xanadu sponsors the following government-provided retirement income program:
    •Both employees and employers contribute 5% of pay every year.
    •The pension provided at retirement is equal to 50% of the best 3-year average
    earnings, provided the contributory period was at least 30 years. A proportionately
    reduced benefit is provided if less than 30 years of contributions were made to the
    program.
    •Eligibility for a pension is age 62.
    •The pension is reduced by 5% per year that the retirement age precedes age 67.
    TechCo did not provide either a DB ERP or a DC ERP.
    (a) Evaluate the appropriateness of NOC establishing an ERP for the salaried
    employees of TechCo.
    (b) NOC’s VP of Human Resources is proposing a plan with the same provisions as
    the Full-Time Salaried Pension Plan. Critique this proposal.
    (c) Recommendan alternative program for the salaried employees of TechCo.
    Justify your recommendation.
    **END OF EXAMINATION**
    MORNING SESSION
    COURSE 8: Fall 2003 -8- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Afternoon Session
    **BEGINNING OF EXAMINATION 8**
    COMPREHENSIVE SEGMENT – U.S.
    AFTERNOON SESSION
    All Questions pertain to the Case Study8. (8 points) NOC is considering laying off part of its union workforce to reduce costs. In
    order to avoid layoffs, the union has agreed to discuss changes to the Full-Time Hourly
    Union Pension Plan.
    NOC has proposed to freeze accruals in the pension plan as of September 30, 2003.
    Under the frozen plan, benefits would be determined for all active participants based on
    service earned through September 30, 2003, and no future benefits would accrue.
    The union offers a counter proposal to reduce future accruals as of January 1, 2004.
    Under the union’s proposal, benefits would accrue to December 31, 2003 at the $75 rate.
    After December 31, 2003, benefits would accrue at a rate of $50 per year of service
    earned after December 31, 2003.
    (a) Estimate the change in NOC’s 2003 accounting expense if NOC’s proposal is
    adopted.
    (b) If the union proposal is adopted, estimate the change in the 2003 and the 2004
    accounting expense.
    (c) Describe the effect of NOC’s proposal from both the employee and the employer
    perspectives.
    COURSE 8: Fall 2003 -9- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Afternoon Session
    All Questions pertain to the Case Study
    9. (15 points) NOC is purchasing a refinery from ABC Company, and will offer
    employment to all of the employees at the refinery. All refinery employees are members
    of the ABC Refinery Pension Plan and the ABC Refinery Post-Retirement Medical plan.
    There are no other members of these plans.
    You are given:
    Provisions of the ABC Refinery Plans
    The ABC Refinery Pension Plan provisions are as follows:
    •Normal Retirement Age: Age 65
    •Early Retirement Age: Age 60
    •Normal Retirement Benefit: 1.75% of final earnings times years of service
    •Early Retirement Reduction: Actuarially equivalent
    •Normal Form of Benefit: If married, 50% joint & survivor, without
    reduction. If not married, single life annuity
    •Post-Retirement Indexing: Lesser of 1% or CPI
    •Termination and Pre-Retirement Death Benefits: Lump sum value of the
    accrued benefit, excluding indexation.
    The ABC Refinery Post-Retirement Medical Plan provisions are exactly the same
    as NOC’s.
    COURSE 8: Fall 2003 -10- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Afternoon Session
    All Questions pertain to the Case Study
    9. Continued
    January 1, 2003 Membership Data – ABC Refinery Plans
    The membership demographics of the refinery’s employees are described in the
    following table:
    Age <5 years
    of service
    5-10 years
    of service
    >10 years
    of service
    Total
    <55 # Participants
    Avg Salary
    50
    40,000
    100
    42,000
    50
    46,000
    200
    42,500
    55-65 # Participants
    Avg Salary
    500
    44,000
    1,500
    48,000
    2,500
    50,000
    4,500
    51,444
    >65 # Participants
    Avg Salary
    150
    47,000
    350
    52,000
    250
    57,000
    750
    52,667
    Total # Participants
    Avg Salary
    700
    44,357
    1,950
    48,410
    2,800
    55,018
    5,450
    51,284
    The ABC Refinery Plans have no retirees.
    COURSE 8: Fall 2003 -11- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Afternoon Session
    All Questions pertain to the Case Study9. Continued
    January 1, 2003 Accounting Valuation Results for the ABC Refinery Plans
    Pension Plan Post-Retirement
    Medical Plan
    Market value of assets $350,000,000 $0
    PBO/APBO
    Active members $325,000,000 $280,000,000
    Inactive members 0 0
    Total $325,000,000 $280,000,000
    Service Cost $21,000,000 $15,000,000
    Assumptions and Methods
    Interest 8.5%
    Salary scale 5.0%
    Mortality GAM83
    Turnover None
    Retirement 100% at age 62
    Asset valuation method Market Value
    Actuarial cost method Projected unit credit
    COURSE 8: Fall 2003 -12- GO TO NEXT PAGE
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Afternoon Session
    All Questions pertain to the Case Study
    9. Continued
    Provisions of the Draft Purchase and Sale Agreement
    The main provisions of the draft purchase and sale agreement, prepared by ABC,
    for discussion with NOC, are:
    Pension Benefits
    •Accrued benefits under the ABC Refinery Pension Plan will become
    the responsibility of NOC under its Full-Time Salaried Pension Plan.
    •ABC will transfer the ABC Refinery Pension Plan assets to the NOC
    plan, subject to regulatory approval
    •NOC is required to provide “substantially similar” pension benefits for
    refinery employees following the sale date.
    Post – Retirement Medical Benefits
    •NOC will be responsible for providing retiree medical benefits for
    refinery employees.
    •ABC will make a lump sum cash payment to NOC equal to the
    accounting liabilities for post-retirement medical benefits determined
    using the ABC accounting assumptions.
    Analyze the terms of the agreement and recommend revisions. Justify your
    recommendation.
    COURSE 8: Fall 2003 -13- S
    Retirement Benefits,
    Comprehensive Segment – U.S.
    Morning Session
    All Questions pertain to the Case Study
    10. (7 points) The CEO of NOC is targeting a substantial reduction in operating expenses.
    Three alternatives are being considered:
    (i) An employee lay-off with severance benefits.
    (ii) A temporary early retirement pension enhancement.
    (iii) Phased-retirement.
    (a) Describe advantages and disadvantages of each alternative.
    (b) Describe the accounting implications of each alternative.
    **END OF EXAMINATION**
    AFTERNOON SESSION