Module 6 – EMA
Scenario
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 create and 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 annuallyCFO 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 you to create 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.
Your manager expects that your document for Tasks #1 and #2 combined should total approximately 3-4
pages in length.Important Notes about Inserting Tables
If you need to insert an Excel table into your document, then you must follow the instructions
below to copy and paste the table from Excel into your Word document.
Do:
• Ensure your table fits in the page margins by:
o Selecting the table
o Right-clicking on the table to view the pop-up menu
o Hover your mouse over “Auto Fit”
o Click “AutoFit to Window”.
Do not:
• Paste as Picture
• Insert Object
• Use Word’s “Insert, Table, Excel Spreadsheet” function, since this will not paste your
table in the correct format.
Pasting a table as a picture or as an object will result in an automatic disqualification of your
submission. (Graphs pasted as pictures are not affected by this requirement.)
Steps for pasting tables (for Windows versions of Word/Excel):
1. Copy the cells from your Excel spreadsheet. If you use the Copy
command on the Home tab, do not select the option to “copy as picture”.
2. In your Word document, turn on the “Show/Hide Paragraph Marks”
feature.
3. In your Word document, right-click where you want to insert your table.
4. In the menu that pops up, under Paste Options, select any of the first four
options:
a. “Keep Source Formatting”
b. “Use Destination Styles”
c. “Link & Keep Source Formatting”
d. “Link & Use Destination Styles”
5. If you have “Show/Hide Paragraph Marks” turned on, you should see
small circles at the end of each cell in your table. This is how you can
know whether or not you have pasted your table correctly.
Steps for pasting tables (for Mac versions of Word/Excel):
1. Copy the cells from your Excel spreadsheet. If you use the Copy
command on the Home tab, do not select the option to “copy as picture”.
2. In your Word document, turn on the “Show All Nonprinting Characters”
feature.
3. In your Word document, right-click where you want to insert your table.
4. In the menu that pops up, click Paste (not Paste Special).5. If you have “Show All Nonprinting Characters” turned on, you should see
small circles at the end of each cell in your table. This is how you can
know whether or not you have pasted your table correctly.
As You Complete Your Tasks…
Your name should not appear anywhere in your submission, or in the filename, or in any way
identify you as the author. If you believe you should refer to yourself in the context of an answer,
use “FAP Candidate” instead of your actual name.Module 6 – EMA
Scenario
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 create and 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 annuallyCFO 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 you to create 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.
Your manager expects that your document for Tasks #1 and #2 combined should total approximately 3-4
pages in length.Important Notes about Inserting Tables
If you need to insert an Excel table into your document, then you must follow the instructions
below to copy and paste the table from Excel into your Word document.
Do:
• Ensure your table fits in the page margins by:
o Selecting the table
o Right-clicking on the table to view the pop-up menu
o Hover your mouse over “Auto Fit”
o Click “AutoFit to Window”.
Do not:
• Paste as Picture
• Insert Object
• Use Word’s “Insert, Table, Excel Spreadsheet” function, since this will not paste your
table in the correct format.
Pasting a table as a picture or as an object will result in an automatic disqualification of your
submission. (Graphs pasted as pictures are not affected by this requirement.)
Steps for pasting tables (for Windows versions of Word/Excel):
1. Copy the cells from your Excel spreadsheet. If you use the Copy
command on the Home tab, do not select the option to “copy as picture”.
2. In your Word document, turn on the “Show/Hide Paragraph Marks”
feature.
3. In your Word document, right-click where you want to insert your table.
4. In the menu that pops up, under Paste Options, select any of the first four
options:
a. “Keep Source Formatting”
b. “Use Destination Styles”
c. “Link & Keep Source Formatting”
d. “Link & Use Destination Styles”
5. If you have “Show/Hide Paragraph Marks” turned on, you should see
small circles at the end of each cell in your table. This is how you can
know whether or not you have pasted your table correctly.
Steps for pasting tables (for Mac versions of Word/Excel):
1. Copy the cells from your Excel spreadsheet. If you use the Copy
command on the Home tab, do not select the option to “copy as picture”.
2. In your Word document, turn on the “Show All Nonprinting Characters”
feature.
3. In your Word document, right-click where you want to insert your table.
4. In the menu that pops up, click Paste (not Paste Special).5. If you have “Show All Nonprinting Characters” turned on, you should see
small circles at the end of each cell in your table. This is how you can
know whether or not you have pasted your table correctly.
As You Complete Your Tasks…
Your name should not appear anywhere in your submission, or in the filename, or in any way
identify you as the author. If you believe you should refer to yourself in the context of an answer,
use “FAP Candidate” instead of your actual name.