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**
AFTERNOON SESSION

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