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 other net assets are not relevant. What are the plan's funded ratio and its deficit?
The funded ratio is 80% and the deficit is USD 120 million. The ratio equals assets of 480 divided by the obligation of 600, and the deficit is the obligation minus assets, which is 120 million. The sponsor must eventually fund this gap.
- AFunded ratio 125%; surplus USD 120 million
- BFunded ratio 80%; deficit USD 120 millionCorrect
- CFunded ratio 80%; deficit USD 480 million
- DFunded ratio 20%; deficit USD 120 million
Explanation
Funded ratio = assets / PBO = 480/600 = 80%. Deficit = 600 - 480 = USD 120 million. The 125% figure inverts the ratio, which is a wrong-base mistake.
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