5. (9 points) In order to attract and retain employees in senior positions, NOC wants to
introduce terminal funding by providing the options of an insured annuity or a lump sum
benefit for the National Oil Full-Time Salaried Supplemental Retirement Plan (SRP).
The lump sum will be equivalent to the net present value of the after-tax annual SRP
benefit. The after-tax payment from the insured annuity will be equal to the after-tax
annual SRP benefit. NOC will reimburse the member for any immediate taxes payable
under both options.
You are given:
• Pat, a senior executive of NOC, will retire with an annual pension under the SRP
of $100,000.
• The before-tax discount rate used by NOC to calculate lump sum benefits is 10%.
• Lump sum annuity factors at Pat’s retirement date are:
At a discount rate of 10%: 9.5
At a discount rate of 6%: 13.5
• The cost of buying Pat’s annuity at retirement is $10 for every $1 of annual
benefit purchased.
Gevrey’s tax rules for single premium annuity contracts are:
• The employer obtains a deduction for any premiums it pays;
• The executive is immediately taxed on the full purchase price of the annuity;
• A proportionate part of each annuity payment would be deemed a tax-free return
of the premium (“exclusion ratio”) and the balance is taxable at the individual tax
rate. For this purpose, a life expectancy of 20 years is used.
(a) Describe the issues that NOC must address in adopting a terminal funding
approach.
(b) Calculate the cost differential between the two terminal funding options.
Show your work.
COURSE 8: Fall 2004 - 5 - STOP
Retirement Benefits,
Comprehensive Segment - Canada
Morning Session
Questions 2 – 6 pertain to the Case Study
6. (12 points) NOC is proposing the following changes to the Retiree Health Benefit
program of its salaried employees:
• Effective January 1, 2004, the program will be closed to new employees;
• Salaried employees with less than 20 years of service at January 1, 2004 who do
not retire before January 1, 2005 will not be eligible for the benefit after that date;
and
• For all other salaried employees, effective January 1, 2005, the portion of the
premium paid by the program will be in accordance with the following schedule:
Years of Service at
Retirement
Plan Retiree/Spouse
20-24 50% 50%
25-29 75% 25%
30+ 100% 0%
NOC wants an analysis of the proposed changes, in respect of the following groups of
employees:
• Group A – the salaried employees who are currently eligible for the benefits but
who lose the benefits if they do not retire in the next year;
• Group B – the salaried employees other than those in Group A who are no longer
eligible to receive benefits under the program;
• Group C – the salaried employees who are eligible, under current assumptions, to
receive reduced benefits under the program; and
• Group D – the salaried employees not affected by the proposed changes.
(a) (7 points) Based on the age and service distribution of the NOC Full-Time
Salaried Pension Plan at January 1, 2004, estimate the number of salaried
employees in Groups A, B, C and D. Identify any assumptions you used in your
estimate.
(b) (3 points) Describe any special accounting treatments that are applicable for
Groups A, B, C and D.
(c) (2 points) Describe the consequences to NOC of the proposed changes.
**END OF EXAMINATION**
MORNING SESSION
COURSE 8: Fall 2004 - 6 - GO TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment - Canada
Afternoon Session
**BEGINNING OF EXAMINATION 8**
COMPREHENSIVE SEGMENT - CANADA
AFTERNOON SESSION
Questions 7 – 9 pertain to the Case Study