Case Study 1—Defined Benefit Plan

This chapter provides a case study of a defined benefit plan. The intent of the case study is to illustrate some of the principles discussed in the book's previous chapters. The case study is about a corporate pension plan that has suffered significant losses in the value of plan assets over the past five years. The funding ratio (ratio of assets to liabilities) has deteriorated. The trustees engage an investment advisor to assist the plan with a review of the current asset portfolio and to recommend any changes to its composition. The case study works through various issues involved in this review. The investment objectives are reviewed along with their expression in the statement of investment policies and objectives (SIPO). An asset‐liability study is conducted and an appropriate asset allocation is chosen given the current funding status. The case study serves to highlight key areas trustees should focus on and how the risks discussed in previous chapters may be managed.