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Strategic Risk Management: A Practical Guide to Portfolio Risk Management by David Iverson

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CHAPTER 17

Case Study 1—Defined Benefit Plan

BACKGROUND

A corporate pension plan, Sky Pension Plan (SPP), has suffered significant losses in the value of plan assets over the past five years. The previous trustees had unwisely chosen to invest in commercial and residential real estate near corporate headquarters. Market conditions have proved to be difficult, and the value of land and buildings has suffered significant losses while the economic downturn has resulted in the termination of several key tenants. As a result, the real estate portfolio has suffered significant impairment, with more than half of the properties remaining untenanted.

The funding ratio of the plan—the value of assets to actuarial liabilities—has fallen to around 65 percent. The trustees have been replaced.

FINANCIAL POSITION AND ACTUARIAL VALUATION

The current financial position of the plan is shown in Table 17.1.

Table 17.1 Portfolio Composition of Sky Pension Plan ($ '000s) as of June 30, 2012

Investments
Commercial real estate 126,000
Residential real estate 62,000
U.S. listed equities 5,000
TOTAL ASSETS 194,000
Less term liabilities 12,000
Net assets available to pay benefits $182,000

The fund's actuary has provided preliminary actuarial valuations and assumptions current as of June 30, 2012.

Actuarial Assumptions

A summary of the actuary's assumptions is shown in Table 17.2.

Table 17.2 Actuarial Assumptions

Discount rate Expected return of the plan, less tax and investment fees ...

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