5. (12 points) Retiree medical premiums are expected to increase by 25% this year. The
CEO of NOC is proposing to drop retiree medical coverage and increase pension
benefits to replace the lost medical benefits.
(a) Describe the effect of the CEO’s proposal on pension expense and funding.
(b) Describe alternative retirement plan design options that could meet the CEO’s
objective.
(c) Calculate the 2002 expense for the retiree medical plan if coverage is eliminated
for some of the active participants causing the active APBO and service cost to
decrease by 60%.
Show all work.
(d) Evaluate other cost containment alternatives for NOC’s retiree medical plan.
COURSE 8: Fall 2002 - 7 - GO TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment
Morning Session
All Questions pertain to the Case Study
6. (14 points) NOC has declared bankruptcy. As a result, the government of Belair has
imposed the termination of each of NOC’s Eligible Retirement Plans (ERPs) effective
January 1, 2002.
You are given the following information as at January 1, 2002:
NOC Full-Time Salaried
Pension Plan
NOC Full-Time Hourly
Union Pension Plan
Total plan termination
liabilities (000’s)
$450,000 $480,000
•Active members $380,000 $375,000
•Inactive members $70,000 $105,000
Liability dur ation (years)
•Active members 12 15
•Inactive members 5 8
You are given:
•Plan termination liabilities have been determined based on benefits accrued to
January 1, 2002.
•Plan termination liabilities have been valued using the annuity purchase rate at
January 1, 2002 of 6.25% per annum.
•Active members’ termination entitlements will be paid on December 31, 2002. The
amount paid will be the plan termination liability as at January 1, 2002 updated with
interest at 6.25% per annum to the date of payment.
•Inactive members will receive an annuity purchased on December 31, 2002 from an
insurance company on their behalf.
COURSE 8: Fall 2002 - 8 - STOP
Retirement Benefits,
Comprehensive Segment
Morning Session
6. (CONTINUED)
(a) (4 points) Assess the effect that the bankruptcy of NOC will have on the benefits
provided to members of each of NOC’s retirement plans.
(b) (3 points) Formulate an investment strategy for the NOC Full- Time Salaried
Pension Plan and the NOC Full-Time Hourly Union Pension Plan for 2002.
Contrast this to the current investment strategy.
(c) (7 points) Assuming that annuity purchase rates drop to 5.75% at December 31,
2002 and assets return 9% during 2002, calculate the 2002 expense and
accounting disclosure for each of NOC’s terminated ERPs.
Show all work.
**END OF EXAMINATION**
MORNING SESSION
COURSE 8: Fall 2002 - 9 - GO ON TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment
Afternoon Session
**BEGINNING OF EXAMINATION 8**
AFTERNOON SESSION
Beginning With Question 7
All Questions pertain to the Case Study
7. (12 points) Belair has just adopted a new Social Security Retirement System. Companies
are allowed a one-time election to participate in the system or opt out. Companies that
opt out are required to provide a mandatory minimum retirement benefit.
Social Security Retirement System Provisions
•Retirement benefits are payable at age 65.
•The retirement benefit is 0.5% of a worker’s best 5- year average covered earnings
times years of covered service, indexed for post retirement cost of living increases.
•Covered earnings are limited to $50,000 per year, indexed for cost of living increases.
•A year of covered service is credited for each year in which a contribution is paid, to
a maximum of 40 years.
•Covered Service commences on January 1, 2002.
•The system is funded by employer contributions of 4% of covered earnings matched
by equal employee contributions.
•The contributions are tax deductible to the employer and the employee.
Minimum opt out benefit
(i) a DC ERP with employer contributions equal to 6% of earnings up to the
covered earnings limit, or
(ii) a DB ERP paying at least 0.8% of best 5-year average earnings up to the
covered earning limit times years of service after January 1, 2002, payable
at age 65.
COURSE 8: Fall 2002 - 10 - GO ON TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment
Afternoon Session

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