Weighing three funding strategies for a one-person pension plan liability. Assumptions given to you to estimate this one-person plan liability are as follows:

Assumptions: Participant Age 30 Retirement Age 65 Mortality Age 82 Number of Annual Retirement Payments 17 Age 82 minus Age 65 = 17 years) Number of Annual Investments 35 (Age 65 - Age 30 = 35 Annual Investments) Current Compensation $100,000 Annual Growth in Compensation 4.00% Expected Return on Investment Assets 8.00% Retirement Benefit Amount 50% of Final Compensation at Retirement

Methods under consideration for financing this liability are:

Equal Dollar method- Under this method, and based on the above assumptions, estimate the benefit payment stream needed at retirement. Then calculate how much level-dollar investment must be made each year to meet this obligation. This approach is analogous to buying a whole life insurance policy with level annual premium dollars. Equal Percentage of Compensation method- Based on the assumptions above; calculate the benefit payment stream at retirement. For this solve, calculate and state the solution as a fixed percentage of the participant's compensation. The intention here is to make annual investments that are equal to a fixed percentage of compensation keeping in mind that compensation is growing at 4% annually (i.e., annual investments equal to 5.00% of compensation). My experience has shown me that CFOs like this approach for a variety of reasons outside of this exercise. Present Value of Retirement Benefit Obligation method - Under this method, as in the other two methods, you will first calculate the future value amount that will sufficiently support the retirement benefit payment stream. But under this method, you need to calculate the present value of each annual investment in order to meet the future retirement plan obligation. For example, if the future obligation is $350,000 at age 65, and you have 35 years of investments to meet this target, you will make average annual investments of $10,000 each year ($350,000 /35 years). But this $10,000 does not consider investment earnings (therefore, it is not discounted). For this solve calculate the present value of each $10,000 annual investment, discounted by the expected return on investment assets.

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