1. A mature defined benefit pension scheme currently has an investment allocation

strategy of:

60% invested in global equities and

40% invested corporate bonds.

The scheme is closed to new entrants but is open to future benefit accrual.

The funding valuation discount rate is set with regards to the expected return of the

Scheme's assets and there is currently a small deficit on the funding basis.

(i) Outline the advantages and risks of the current investment strategy. [7]

It has been suggested that the scheme's investment strategy should move to 100%

invested in domestic Government bonds.

(ii) Discuss the impact of moving to the proposed investment strategy. [8]

The 100% Government bonds investment strategy has now been adopted.

(iii) Set out the principles that will apply to calculating transfer values. [5]

On retirement, the members of the scheme have the option to take a transfer value and

use it to purchase an annuity from an insurance company to provide their pension.

(iv) Set out the advantages of this option for members and the employer. [5]

2. (i) List EIGHT factors which should be considered when deciding whether a

model is suitable for a particular purpose. [4]

A colleague has been asked to present a model which might be used to determine the

number of new schools required throughout a country over the next 40 years. He

forgot all about it until the last minute when he was reading an article in a newspaper

about immigration and education which provided some figures to back up the article.

Your colleague has the following suggestion for a model:

Start with the number of children in the education system over the last twenty

years (as provided by the country's central statistical office). Project these

forward using a straight line approach.

Use the number of immigrants predicted to arrive in each of the next five years as

given in the newspaper article. Apply to this an estimate of "number and age of

children for each immigrant" also provided by the newspaper. Project this

forward also using a straight line approach.

Add the two together to get the total number of children in the education system

for the next 40 years.

(ii) Assess whether this model is suitable with regards to SIX of the factors which

you listed in your answer to part (i). [6]

3.

NSG Asset Management has suffered the withdrawal of significant volumes of assets under management in its flagship fund over the last three years due to perceived poor performance. The flagship fund is managed by three portfolio managers, one responsible for equities, one for fixed income and one for making asset allocation decisions. The senior management of NSG Asset Management has brought in a consultant to identify where improvements could be made. NSG has provided the consultant with the following information: Year 1 Year 2 Start value Fund Sector Fund Sector (Sm) return return return return Emerging market equities 40 10% 11% 9% 9% Small cap equities 55 12% 9% 14% 12% Large cap equities 30 6% 6% 7% 7% Corporate bonds 35 8% 8% 5% 7% Government bonds 30 -3% 0% 4% 6% Cash 10 0% 0% 1% 1% Note: The overall benchmark is calculated as an equal fixed weight to all asset classes (excluding cash) within the fund. The benchmark is rebalanced annually. A disinvestment of $60m was made at the end of the first year. The asset allocation portfolio manager decided $18m should be taken from bonds and $42m from equities. Assume equal disinvestment within the sub-classes of equities and bonds. (i) Calculate for the total period, showing all your workings, the value added from: . stock selection for equities. [5] . stock selection for bonds. [5] sector asset allocation (between equities and bonds, but NOT the sub- classes within equities and bonds). [5] total performance of the fund relative to the benchmark. [2] (ii) Explain, with reasons, the action the consultant is likely to recommend to the senior management of NSG. [4]