You are a pension consultant who was recently engaged by Awesome Benefit Company (ABC) to become the valuation actuary for their frozen defined benefit pension plan. You have also been hired to help with delivering and tracking a funding strategy for the maintenance and eventual termination of the plan.

• Your assignment with the pension plan is brand new to your consulting firm and the valuation processes are being initiated for the first time. You will be given experience data and prior valuations from the previous actuary.

• The plan has an annual valuation every January 1.

• The plan was frozen (no additional benefit accruals for plan participants) 5 years ago.

• ABC has adopted a liability driven investment (LDI) strategy to maintain funded status.

o The LDI strategy involves creating an asset mix of similar nature to the characteristics of the plan liabilities (e.g. duration matching) to prevent large swings in funded status).

• The plan currently has the following characteristics as of the most recent January 1 valuation:

o $1,350 million in assets.

o $1,500 million in liabilities.

o 90% funded percentage; $150 million funding shortfall.

• Termination of the pension plan would primarily relieve the company of any future risk and obligations to the plan participants. ABC would like to implement a strategy to fully fund the plan within the next 10 years and sometime afterward terminate the plan by transferring the assets and liabilities to an insurer.

You have assigned your actuarial student to complete the following primary objectives:

• Set-up a process for the annual valuation.

o For the initial year, this will include matching to the prior actuary's results.

• Build a tracking and projection model that is intended to serve two purposes:

• Provide monthly tracking of the plan's funded status based on current market conditions.

o Additionally, the model can interpolate results between months based on asset benchmarks. Results can then be communicated to the client on an ad-hoc basis.

• Create updated 5-year funding projections monthly based on current market experience.

For the first objective, your actuarial student has performed the initial January 1 valuation including the creation of the baseline assumptions. The primary assumptions you should focus on include the following, some of which rely on the previous assumptions and experience data from the prior actuary:

• Retirement Rates.

• Withdrawal Rates.

• Mortality Rates.

• Expected Rates of Return.

• Discount Rates.

The newly created tracking and projection model will also use projected market return and discount rate assumptions that are provided by a third-party investment consultant. Your consulting firm pays a fee (which is indirectly charged to ABC) to the vendor for this data.

The projected cash flows used in the tracking model are based on the prior January 1 valuation and are updated annually.

The CFO at ABC is very detail oriented and likes to keep close track of the plan's funded status. The

CFO is eager to react to situations where a change in the asset allocation or funding strategy could be warranted. Your actuarial student will be sending a brief monthly summary to the CFO via email going forward. 

Task 1

You have been asked by your manager to outline the process of how the model should be used. Be sure to address the following:

• Confirmation of the problem you have been asked to solve.

• Identification of how the model will be created including any associated risks.

• Inputs, assumptions, and constraints associated with the model.

Your response should come in the form of documentation that can be stored in your internal company records for future reference. Please be sure to explain, in detail, all three of the items listed above in your response.

Task 2

Several years have passed, and you have been asked to review the current tracking and projection model to determine if it is still appropriate for the pension plan. For the most part, the model has generally been reliable. However, there have been some issues related to the alignment of the initial assumptions setting with the emerging experience. Additionally, some other items were brought to your attention:

• The timing of the data feed related to the future asset return and discount rate assumptions from the third-party vendor has proven to be unreliable at times. The CFO has commented as such when monthly reports were delayed as a result.

o Also due to technical issues, the feed that was intended to be automatic has at times needed to be imported manually, which has consumed significant resources.

• Intramonth benchmarking has generally been reliable, however, there were several instances when experience deviated from benchmarks and significant true-ups were required.

• Forecasted contributions have generally created an accurate picture of future expectations on a deterministic basis. However, the CFO has asked if stochastic projections are possible, to be able to visualize a funnel of doubt based on 1000 different scenarios.

• Potential issues with the tracker given that liability cash flows are only updated annually.

In light of these observations, your manager has asked you to produce two internal documents for your findings:

1. In the first document, your manager would like a detailed analysis of the challenges surrounding the model, including the appropriateness of the assumptions. In an informal response, recommend ways that these can be tested and be sure to address the following:

• General recommendations for improvements based on the experience listed above and consider any other potential feedback that could be solicited from others, both internal and external.

• Model revisions necessary to implement recommendations.

2. In the second document, your manager would like a maintenance document that can be used as a guide going forward. Outline potential procedures in a formal document and be sure to include the following:

• Data and systems required to monitor future experience.

• Processes to implement future revisions to the model