“MANAGING INSTITUTIONAL INVESTOR PORTFOLIOS” (STUDY SESSION 10) B)...

1. “Managing Institutional Investor Portfolios” (Study Session 10)

b) discuss investment objectives and constraints for defined benefit plans;

c) appraise pension fund risk tolerance when risk is considered from the perspective of

the 1) plan surplus, 2) sponsor financial status and profitability, 3) sponsor and

pension fund common risk exposures, 4) plan features, and 5) workforce

characteristics;

d) formulate an investment policy statement for a defined benefit plan;

e) evaluate the potential effects of a corporate pension fund investment policy on plan

surplus, the corporation’s valuation, and the corporation’s constituents.

Guideline Answer:

Part A

BC Plc has below average risk tolerance, compared to the average FTSE 350 company pension

plan, for any four of the following reasons:

• BC Plc’s pension plan is more under-funded. The ratio of plan assets to plan liabilities at

0.83 is less than 1.0 and below the FTSE 350 average of 0.97.

• BC Plc’s workforce has a higher average age.

• BC Plc’s workforce has a higher ratio of retired lives to active lives.

• BC Plc’s workforce has higher years of service.

• BC Plc has lower profitability.

• BC Plc has a higher debt ratio.

Part B

Characterize, for the

BC Plc pension plan

relative to the average

FTSE 350 company

Constraint

Justify each of your responses with two reasons

pension plan, each of

the two plan

constraints of concern

to the trustees

(circle one)