7. (CONTINUED)
(a) Explain the issues NOC needs to consider in deciding whether to opt in or out
of the Social Security Retirement System.
(b) Evaluate NOC’s ERPs with respect to opting in or out of the Social Security
Retirement System and make a recommendation. Justify your response.
COURSE 8: Fall 2002 - 11 - GO ON TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment
Afternoon Session
All Questions pertain to the Case Study
8. (11 points) NOC is converting its SRP to a DC ERP for future service effective
December 31, 2001. SRP benefits are determined at the executive’s retirement date,
using earnings at that time, but service accrued to December 31, 2001.
(a) What factors should NOC consider in determining an appropriate DC
contribution formula?
(b) Evaluate this change from both the executives’ and NOC’s point of view.
(c) Analyze the effect of this change on 2001 and 2002 expense.
(d) NOC executives are offered the opportunity on January 1, 2002 to take their
accrued SRP benefit as a lump sum cash payment. Calculate the effect on the
2002 expense given the following:
Accepted Declined Total
Number 21 21 42
Average age 48.9 53.1 51.0
Average future working
lifetime (years)
8.5 6.5 7.5
Average earnings (2001) $260,000 $330,000 $295,000
Projected benefits obligation
prior to distribution
$6,597,000 $12,187,000 $18,784,000
Lump sum distributions $5,867,000 $0 $5,867,000
COURSE 8: Fall 2002 - 12 - STOP
Retirement Benefits,
Comprehensive Segment
Afternoon Session
All Questions pertain to the Case Study
9. (7 points) You are employed by Big Bank and are the actuary for NOC. The investment
arm of Big Bank sends a proposal to NOC’s CEO offering a bundled package of services
if the pension assets are moved to Big Ba nk. The bundled services include better
financing terms for NOC and a reduction in actuarial service fees.
(a) Calculate the 2001 risk adjusted rate of return for each of NOC’s retirement
funds, given:
b 0 9 .
Rf 0.04
Rm 0.03
Show all work.
(b) Describe how a Statement of Investment Policy can help the CEO evaluate
investment manager performance.
(c) Describe the CEO’s obligations to the plans and to NOC.
(d) Describe your professional obligations to the plans and to NOC.
**END OF EXAMINATION**
AFTERNOON SESSION

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