MSSI

DEFINED BENEFIT PLAN CASE: DESIGNING THE INVESTMENT STRUCTURE FOR MSSI CORPORATION'S DEFINED BENEFIT PLAN.

Background info:

MSSI Corporation offers a defined benefit plan for its employees. You are invited to design and present an investment structure for the pension plan, including an assetliability study and an asset allocation and funding proposal, with the anticipation of assuming full investment management responsibility for the plan. To facilitate your work, the pension committee has kindly sent you a copy of its latest actuarial valuation reports as factual bases for your work.

Issues to consider:

A rule of thumb in the pension investment world is the "60/40 rule"that is, 60 percent equity and 40 percent bonds.

Can you apply this general 60/40 rule to the plan?

What funding levels provide what comfort level of the plan retaining a healthy status through time?

Can you quantify the risk-return trade-off (in easy-to-understand terms) for the pension committee?

The Assignment:

You are an associate portfolio manager at DBSol reporting to Jay. He has asked you to design a program for the pension plan. The program must include the following:

1. An analysis of the current liability exploring the cost to maintain the plan and the growth of the liability through time.

2. An analysis of the current funding status, including the future of the plan with the current funding and asset allocation strategy, and key risk measure definitions.

3. Proposed funding and asset allocation strategies.

4. Analysis of these strategies and their potential impact on the funding status of the plan in the future.

Jay suggests starting by looking at the actuarial report and the spreadsheet (provided online). The spreadsheet provides a template for analyzing the liability. Note that you'll need to find and insert (highlighted in yellow) discount rates before the present values make sense