Future pension contributions required will be directly affected by: A) | the expected return on existing plan assets and and pension expense requirements. |
| | B) | the expected return on existing plan assets and pension default expectations. |
| | C) | prior expected return estimates and pension expense requirements. |
| | D) | prior expected return estimates and pension default expectations. |
|
Answer and Explanation
A pension plans contribution level can be impacted by the expected return on plan assets. The contribution amount can be greatly reduced or eliminated altogether by setting high enough return expectations. Pension expenses must be recognized on a sponsors income statement and, hence, must be considered in the overall return objective. Interestingly, negative pension expense, or pension income, can also be recognized.
Considering the characteristics of Branch Industries and the Plan, which of the following statements best describes the ability of the pension plan to take risk? A) | Average ability to take risk. |
| | B) | Above-average ability to take risk. |
| | C) | Below average ability to take risk. |
| | D) | No ability to take risk. |
|
Answer and Explanation
Overall, the data Smith has gathered so far indicate an average tolerance for risk. The plan surplus indicates that the present value of plan liabilities is more than covered by the present value of plan assets. Pension plans with restrictive plan features, such as no early retirement or lump-sum distribution provisions increases the duration of the liabilities which, in turn, allows for a higher risk tolerance. The workforce is young; a high active to retired lives ratio indicates a large portion of the workforce is still working while only a small portion of beneficiaries is receiving plan benefit payments. All of these factors indicate an above-average ability to take risk. However, if the Pension Committee were to decrease the discount rate, the PBO would rise and the surplus could disappear. Also, a spike in commodity prices (silver required and only one supplier) and/or the cyclicality of the auto industry could adversely affect Branchs sales and profit margins. Hence, Branchs ability to make contributions if the economy slumps, could be compromised. In addition, Branch is more heavily leveraged than its competitors. This could also impact its ability to make timely contributions in an economic downturn. These factors imply less ability to take risk, especially in light of the Pension Committees expressed desire to control the volatility of contributions.
Which of the following factors should NOT affect a pension plans ability and/or willingness to take risk? | | B) | Sponsor financial status and profitability. |
| | C) | Workforce characteristics. |
| D) | Portfolio manager's investment style. |
|
Answer and Explanation
The investment style of a portfolio manager has no affect on a plans ability and willingness to take risk. Portfolio managers are chosen after risk considerations are determined. To varying degrees, all of the other factors will have a direct affect on a plans ability and willingness to take risk.
To maximize the sponsors ability to make pension contributions and meet the Pension Committees desire to manage contribution volatility, Smith should give the most consideration to the correlation between the sponsors: | A) | operating profitability and Plan termination potential. |
| | B) | operating profitability and industry-wide profitability. |
| C) | operating profitability and Plan asset returns. |
| | D) | net income and the Plans ABO. |
|
Answer and Explanation
The correlation between the sponsors operating profitability and plan asset returns comes directly to bear on the firms required contributions and its ability to make them. When operating profitability and plan asset returns are high, the probability of having to make greater than average contributions is low, but at a time when the sponsor is most able to make a contribution. Alternatively, when operating profitability and plan asset returns are low, the probability of having to make contributions is high, but at a time when the sponsor may have difficulty making a contribution. Minimizing the correlation between the sponsors operating profitability and plan asset returns will maximize the probability that the sponsor will be able to make contributions when required to do so.
| 
发表于 2008-9-17 11:29
| 