7. (8 points) Your client NOC is budgeting for fiscal year 2005 in June of 2004. They have
asked you to estimate the fiscal year 2005 pension expense for the National Oil Full-Time
Hourly Union Pension Plan.
You are given (all numbers in $000’s):
Accrued Benefit Obligation at January 1, 2004 with 6% discount rate = 560,919
Service Cost at January 1, 2004 with 6% discount rate = 27,169
2005 Estimated Employer Contributions = 38,000
2005 Estimated Benefit Payments = 12,100
(a) Describe the considerations for selecting the return on assets during 2004 and the
discount rate for 2005 for budgeting purposes.
(b) Estimate the 2005 pension expense using a discount rate of 6% and assuming no
other gains or losses.
(c) Describe and estimate the effect of a change in the economic environment on each
component of your estimate of the 2005 pension expense.
COURSE 8: Fall 2004 - 7 - GO TO NEXT PAGE
Retirement Benefits,
Comprehensive Segment - Canada
Afternoon Session
Questions 7 – 9 pertain to the Case Study
8. (12 points) NOC’s Vice-President of Human Resources has asked you to propose
changes to NOC’s Full-Time Salaried Pension Plan in order to reduce cost. She believes
that the pension plan is too generous for participants who retire before age 60, and she
wants plan participants to retire later in the future.
(a) Describe the process you would undertake in performing a plan design project.
(b) Recommend possible plan design changes to meet the goals of the Vice-President
of Human Resources. Provide support for your recommendation.
(c) The government of Gevrey is proposing introducing a pension adjustment system
similar to that defined by the Canadian Income Tax Act. Describe how your
response to (b) would change as a result of this proposal.
COURSE 8: Fall 2004 - 8 - STOP
Retirement Benefits,
Comprehensive Segment - Canada
Afternoon Session
Questions 7 – 9 pertain to the Case Study
9. (10 points) Gevrey 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 Gevrey.
• Contributions are invested at the direction of the employees by privately managed
investment companies selected by Gevrey.
• 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