Alexander Ellington, President of Ellington Foods, has contacted your firm to discuss the company’s defined-benefit pension plan. He has provided the following information about the company and its pension plan:

• Ellington Foods has annual sales of $300 million
• The annual payroll is about $100 million
• The average age of the work force is 43 years
• 30% of the plan participants are now retired
• Company profits last year were $10 million and have been growing at 10% annually. The Ellington Foods pension plan has $80 million in assets and is currently overfunded by 10%
•                             The duration of the plans liabilities is 15 years
•                             The discount rate applied to the liabilities is 6%
•                             Fund trustees wish to maintain 5% of plan assets in cash

Ellington would like to achieve a rate of return of 6.5% on its pension fund (which is less than the 8.7% the fund has historically achieved). Ellington would like to be able to reduce contributions to the pension fund and possibly increase employee benefits.

Formulate and justify investment policy objectives for the Ellington Foods pension plan in the following three areas (15 pts total):

1. Return objective

2. Risk tolerance

3. Time horizon

 

Answer rating: 100% (QA)

ANSWERS 1Return objective Ellington would like to achieve a rate of return of 7 ... View the full answer