Csp Q01

Front 1

Question 1
NOC is undergoing a comprehensive plan design to evaluate the appropriateness of its retirement plans.
(A) Summarize the risks that retirees face and how those risks can be mitigated
(B) Describe the two approaches to distributing/investing retirement income during retirement, as well as their advantages and disadvantages
(C) Summarize the risks a retirement plan sponsor should consider when designing a retirement plan and who bears them.
(D) Describe the different steps countries can take to protect pension benefits.

Back 1

(A) - What risks do plan members and retirees face.
- Ways of addressing lack of financial literacy and trying to change employee behavior
- Ways housing can be used to finance retirement
- List some ways of mitigating longevity risk
- List some ways of mitigating financial risk from the loss of a spouse
- List some ways of mitigating general inflation risk
- List some ways of mitigating interest rate risk
- List some ways of mitigating stock market risk
- List some ways of mitigating business risk
- List some ways of mitigating employment risk
- List someways of mitigating public policy risk
- List some ways of mitigating unexpected health care needs and costs risk
- List some ways of mitigating inability to live independently
- List some ways of mitigating lack of appropriate consumer information for decision-making
- Method of mitigating both inflation and market risk
- Method of mitigating both longevity risk and risk of unexpected health expenses
- Way of addressing replacement rate inadequacy
- Degrees of longevity risk affected by
(B) - Two approaches (or a combination) to spending retirement savings
- Comparing the approaches
(C) - Types of Pension Risks and Who Bears Them
(D) - What are the different approaches countries take toward protecting pension benefits?

Front 2

QBS 1: 1,2, and 3 of 31
What risks do plan members and retirees face?
(1,2, and 3 of 3)

Back 2

1) Longevity
2) Death of spouse
3) General inflation
a) Risk further increased for women
b) Risk further increased for early retirees
4) Wage inflation
a) Devalues DC benefit
b) Creates DC benefit volatility
5) Interest rate risk
6) Stock market risk
7) Business risks
8) Employment risk
9) Public policy risk such as higher taxes or reduced benefit
10) Unexpected health care needs and costs
a) Difficult or costly to obtain coverage during retirement
11) Loss of ability to live independently
12) Change in housing needs
13) Change in marital status
14) Unforeseen needs of family members
15) Lack of available facilities or caregivers
16) Lack of appropriate consumer information for decision-making
17) Replacement rate inadequacy/maintaining standard of living

Front 3

QBS 1: 4 of 31
Ways of addressing lack of financial literacy and trying to change employee behavior

Back 3

1) Provide personal experiences
2) Education

Front 4

QBS 1: 5 of 31
Ways housing can be used to finance retirement

Back 4

1) Reverse annuity mortgage
2) Sell home and downsize
3) Home equity line of credit

Front 5

QBS 1: 6 of 31
List some ways of mitigating longevity risk

Back 5

1) Purchase a traditional annuity
2) Reverse mortgage
3) Longevity insurance
4) Managed payout
5) Investment strategies to preserve principal

Front 6

QBS 1: 7 of 31
List some ways of mitigating financial risk from the loss of a spouse

Back 6

1) Life insurance
2) Survivor income from government benefit
3) Long-term care insurance
4) Savings
5) Elect/purchase a joint and survivor annuity
6) Elect/purchase an annuity with a guarantee period
7) Investment strategies to produce income

Front 7

QBS 1: 8 of 31
List some ways of mitigating general inflation risk

Back 7

1) Common stock
2) Inflation indexed bonds
3) Purchase indexed
4) Commodities
5) Home ownership

Front 8

QBS 1: 9 of 31
List some ways of mitigating interest rate risk

Back 8

1) Purchase an immediate annuity
2) Invest in long-term bonds or mortgages
3) Invest in dividend paying stock
4) Multiple annuity purchases

Front 9

QBS 1: 10 of 31
List some ways of mitigating stock market risk

Back 9

1) Diversify portfolio
2) Hedge funds
3) Products with minimum return guarantee

Front 10

QBS 1: 11 of 31
List some ways of mitigating business risk

Back 10

1) Diversify retirement portfolio away from heavy concentration in company stock

Front 11

QBS 1: 12 of 31
List some ways of mitigating employment risk

Back 11

1) Retirement planning should not count heavily on income from bridge job
2) Postpone retirement

Front 12

QBS 1: 13 of 31
List some ways of mitigating public policy risk

Back 12

1) Municipal bonds
2) Roth IRAs
3) Roth 401(k)s

Front 13

QBS 1: 14 of 31
List some ways of mitigating unexpected health care needs and costs risk

Back 13

1) Purchase medical insurance
2) Live a health lifestyle

Front 14

QBS 1: 15 of 31
List some ways of mitigating inability to live independently

Back 14

1) Purchase long-term care insurance

Front 15

QBS 1: 16 of 31
List some ways of mitigating lack of appropriate consumer information for decision-making

Back 15

1) Use advisors

Front 16

QBS 1: 17 of 31
Method of mitigating both inflation and market risk

Back 16

1) Escalating life annuities

Front 17

QBS 1: 18 of 31
Method of mitigating both longevity risk and risk of unexpected health expenses

Back 17

1) Bundled risk annuities

Front 18

QBS 1: 19 of 31
Way of addressing replacement rate inadequacy

Back 18

1) Delay retirement
2) Save more

Front 19

QBS 1: 20 of 31
Degree of longevity risk affected by

Back 19

1) Standard of living desired
2) Employment opportunities
3) Personal savings
4) Social insurance
5) Inherited assets
6) Amount of pension benefit
7) Improvement sin life expectancy
8) Postretirement expenses

Front 20

QBS 1: 21 of 31
Two approaches (or a combination) to spending retirement savings

Back 20

1) Manage your own account
2) Buying an annuity

Front 21

QBS 1: 22, 23 of 31
Comparing the approaches (1 and 2 of 2)

Back 21

Advantages of managing your own money vs. buying an annuity
1) Immediate access to the money
2) Can withdraw more if the fund does better than expected
3) Death benefit
4) Can buy an annuity later
Disadvantages of managing your own money vs. buying an annuity
1) Less initial income
2) Retain investment risk
3) Retain longevity risk
4) Manage own money

Advantages of buying an annuity vs. managing your own money
1) Higher initial income
2) No longevity risk
3) No investment risk
4) No investment decisions to make
Disadvantages of buying an annuity vs. managing your own money
1) Less withdrawal flexibility
2) Lose out on higher asset returns
3) No death benefit
4) Locked into one insurance company

Front 22

QBS 1: 24 to 30 of 31
Types of Pension Risks and Who Bears Them (1 to 7 of 7)

Back 22

1) Job tenure and Wage Risk:
a) Workers: Back-loaded DB plans riskier for worker who changes jobs
b) Firms: Pension costs increases for long-tenure employee in final pay DB plan
2) Early Retirement Risk:
- DB ERF subsidy provides some protection if unable to work past early retirement
- DC plans can't offer this protection
3) Implicit Contract Risk:
- Workers at risk that implicit contracts will be broken (e.g. ad hoc COLA)
4) Longevity Risk:
- Risk of outliving assets if don't receive an annuity
5) Demographic Risk:
- Increasing old-age dependency ratio increases costs for gov't and companies
6) Financial Market Risks:
a) Workers: - Affects generosity of DB benefits and wages if large contributions required
- If DC asset performance poor then benefit reduced
b) Firms: - Long time horizon of pension allows DB sponsors to invest riskier than DC plan
c) Insurance Companies - Employer in DB and employee in DC can transfer risk to insurance company by purchasing an annuity
d) Government - Lower assets increase deductible contributions and reduce taxable DC benefits
7) Risk Due to Wrongdoing:
a) Workers and Firms: - Both at risk due to mishandling of plan assets
b) Government and Insurance Companies:
- Governments reduce risk with legislation, insurance and reporting requirements
8) Risk Due to the Financial Performance of the Plan Sponsor:
a) Workers: DB at risk of lower benefit due to plan termination
- Profit sharing plan passes risk onto employees
- DC members at risk when er contributions invested in er stock
b) Stockholders: Participants given top priority in bankruptcy vs. shareholders and bondholders
9) Interest Rate Risk:
- Ee faces risk if annuitize DC balance and Er bears risk in DB plan
10) Inflation Risk:
- Benefit accrued prior to retirement affected by job changes
- Postretirement recipients at risk if don't receive COLA
11) Risk of Political Change: - Firms face the risk that laws may change which increase pension costs
- Ees also face risk of reduced benefits
- Statutory limits may change and increase risk for top management
12) Replacement ratio risk
- Ee at risk (e.g. career avg. pay plan benefit may be inadequate)

Front 23

QBS 1: 31 of 31
What are the different approaches countries take toward protecting pension benefits?

Back 23

1) Many countries require pension insurance
a) Some run by government
b) Some through heavily regulated private-sector organization
c) May require that annuities be purchased through insurer
2) May have initial eligibility requirements
a) Require low probability of bankruptcy
b) Have profit for 3 preceding years, minimum size, and stable and growing workforce
3) Some base premium on past experience
a) Based on company's total liabilities and total claims against the insurance system for a given year
4) Some base premium on risk and/or flat premium