A UK retailer operates two pension schemes for all its employees but only those who joined before 2005 could join the defined benefit (DB) scheme. All other employees are members of the defined contribution (DC) scheme. The DM scheme applies an accrual rate of 1/50^th . The average age of the members in the DC scheme is 55 years and the current asset allocation of the default option is heavily skewed towards equities, with 80% allocation.

a) Explain the key differences between DB and DC schemes and explain why the employer shut the DB scheme to all employees joining after 2005.

b)Ann Hath joined the company in 1985 and is about to retire after 25 years of sevice. Her current salary is 45,000 and she doesn't expect that to change before she retires. Calculate the pension she is likely to receive upon retirement.

c)Would you consider any adjustments to the asset allocation of the default option in the DC scheme? Justify your answer.

d)The consultant organised the meeting between the trustees of the DC scheme and one of their preferred investment manager. Prior to the meeting, the consultant organised a quick training session for the trustees on the limitations of the mean- variance (MV) optimisation approach. Please list at least 4 assumptions behind the MV optimisation and comment on its 2 limitations.

e)During the actual meeting, the investment manager proposes an alternative optimisation approach that he refers to as the risk-parity model that allocates across a number of risk factors. Please explain what he means by 'risk factors' and 'risk- parity' and list one potential benefit and one potential limitation of the proposed approach.

f)The manager then presents his proposed asset allocation that invests across four equity risk factors: value, lower beta, quality and size. Please define each of these with reference to the variables that are often chosen to select stocks for each of these factors. Also explain why she proposed to include all these factors rather than

bet on just a single one.