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FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans

A DB plan has assets of USD 480 million and a projected benefit obligation (PBO) of USD 600 million. The sponsor's market capitalization is USD 1,500 million. Ignoring taxes, what is the plan's funded ratio and the deficit as a percentage of the sponsor's market capitalization?

The funded ratio is 80% because assets of 480 divided by liabilities of 600 equals 0.80. The deficit is USD 120 million, which is 8.0% of the sponsor's USD 1,500 million market capitalization. The 20% figure is the deficit relative to the obligation, not market cap.

  1. AFunded ratio 80%; deficit 8.0% of market capCorrect
  2. BFunded ratio 125%; deficit 8.0% of market cap
  3. CFunded ratio 80%; deficit 20.0% of market cap
  4. DFunded ratio 80%; deficit 12.0% of market cap

Explanation

Funded ratio = 480/600 = 80%. Deficit = 600 - 480 = USD 120 million. As a share of market cap: 120/1,500 = 8.0%. Using 125% inverts the ratio; 20% confuses the deficit share of the PBO with the share of market cap; 12% is wrong arithmetic.

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