(i) Outline five methods which could be used to assess employer covenant, stating an advantage and disadvantage of each. [10] The trustees of a large defined benefit pension scheme, which has a funding deficit, have recently undertaken an assessment of the sponsoring employer's covenant. The results show that the scheme's funding deficit is financially unmanageable given the employer's resources and it is unlikely the deficit will be removed within an appropriate timescale. (ii) Set out the actions the trustees could take. [4] Two investment managers each managing part of a large pension scheme have produced the following figures: Sm Fund Equities Bonds Real Estate Cash AR 100 25 50 20 5 B 100 35 40 15 10 Constituents of Index (%) Index 30% 50% 20% 0% Performance in year Equities Bonds Real Estate Cash AB A 6.0% 3.0% 7.0% 0.5% 4.5% 4.0% 6.5% 0.5% Index 5% 2% 6% (i) Write down the formulae that you would use to produce attribution analysis for each fund. You should define all terms used. [2] (ii) Carry out an attribution analysis for the two funds in year 1 using the formulae from part (i). [6] The following attribution analysis has been produced for years 2 and 3. Year 2 Fund Performance Index Sector Performance Selection Stock Selection AB A 8.0% 7.0% -0.5% 1.5% B 6.0% 7.0% 0.0% -1.0% Year 3 Fund Index Sector Stock Performance Performance Selection Selection AB 1.5% 3.0% 0.5% -2.0% B 4.5% 3.0% 2.0% -0.5% Both managers are operating under the same mandate with the objective of outperforming their benchmark by 1% p.a. over a three year period. (iii) Comment on the performance over the three year period. [4] A drug named Nimble is often prescribed to the elderly for periods greater than a year to reduce the pain of arthritis. It has been proven that taking Nimble increases the chance of death by heart disease. One local health authority is looking into whether the increased risk continues once a patient stops taking the drug. It proposes to use a model with five states: (1) Never taken Nimble, (2) Taking Nimble, (3) No longer taking Nimble, (4) Dead through heart disease, (5) Dead through other causes. (i) Draw a diagram showing the possible transitions between the five states. Let the transition intensity between state i and state j at time x + be x+1. Let the probability that a person in state i at time x will be in state jat time x + 1 be,p.". [2] (ii) Show from first principles that 33 34 [5] The health authority wishes to calculate death rates aged 50 last birthday from each cause for individuals in states 1, 2 and 3. (iii) State what data would need to be extracted from the health authority's medical records in order to do this. [3]