COURSE 8: November 2001 - 1 - GO ON TO NEXT PAGE
Retirement Benefits
Comprehensive Segment
Morning Session
November, 2001- Course 8R
Society of Actuaries
**BEGINNING OF EXAMINATION**
MORNING SESSION
Questions 1 – 6 pertain to the Case Study
1. (7 points) NOC's cash requirements have increased considerably in 2001.
The CFO proposed to make, on June 30, 2001 a surplus withdrawal from the pension
fund of the National Oil Full-Time Salaried Pension Plan equal to the expected growth of
the surplus during 2001.
The CFO's model for determining the surplus withdrawal is:
•Surplus withdrawal = [Expected Surplus @ 1/1/2002] minus [Surplus @1/1/2001]
•Expected Surplus @1/1/2002 = [Expected Assets @1/1/2002] less [Expected
Liability @1/1/2002]
•Expected Assets @1/1/2002 = [Assets @1/1/2001] * [1 + expected return on the
fund]
•Expected Liability @1/1/2002 = [Liability @1/1/2001] * [1 + discount rate used to
determine the liability]
•The liability to be used is the projected benefit obligation determined under the
expense valuation
The investment managers provided the CFO with an expected return on the fund of
8.83%.
(a) Explain and calculate the effect of the CFO's proposal on the 2001 pension
expense, and year-end balance sheet liability. Treat the surplus withdrawal as a
negative contribution. Show all work.
(b) Critique the model proposed by the CFO.
COURSE 8: November 2001 - 2 - GO ON TO NEXT PAGE
Retirement Benefits
Comprehensive Segment
Morning Session
Questions 1 – 6 pertain to the Case Study
2. (11 points) NOC wants to introduce post-retirement indexing for participants in the
National Oil Full-Time Salaried Pension Plan. NOC is looking for a provision that is
relatively easy to administer and allows NOC to control cost in periods of high inflation.
You are given:
Participants
Years of
Service
Average
Years to
Vesting
Projected Benefit
Obligation (PBO)
as at 1/1/2001
Increase in PBO for 1%
per year indexing after
retirement
Active 0 to 3 4 $1,236,151 $75,000
Active 3 to 5 1 8,000,000 550,000
Active 5 or more - 446,500,000 31,000,000
Deferred vested - - 0 0
Pensioners - - 95,541,600 6,100,000
Total $551,277,751 $37,725,000
The service cost increases by 7% for each 1% per year indexing after retirement.
(a) Evaluate alternative approaches for indexing the National Oil Full-Time Salaried
Pension Plan.
(b) Describe how the plan’s asset allocation should change if NOC adopts automatic
indexation.
(c) Describe how NOC's actuarial assumptions may change if NOC adopts
automatic indexation.
(d) Explain and calculate the effect on the 2001 pension expense of providing
automatic indexation equal to 100% of CPI. Use the current actuarial
assumptions.
Show all work.
COURSE 8: November 2001 - 3 - GO ON TO NEXT PAGE
Retirement Benefits
Comprehensive Segment
Morning Session
Questions 1 – 6 pertain to the Case Study

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