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

A defined benefit plan has assets of USD 80 million and a present value of accrued benefit obligations of USD 100 million. Assets are expected to return 6% over the year, while the obligations are discounted at 5%. Ignoring contributions and benefit payments, what is the expected funded status at year-end?

Assets grow to USD 84.8 million and liabilities to USD 105 million, giving a deficit of about USD 20.2 million. This is slightly larger than the starting deficit of USD 20 million because liabilities grow by 5 million while assets grow by 4.8 million.

  1. ADeficit of USD 17.0 millionCorrect
  2. BDeficit of USD 20.0 million
  3. CDeficit of USD 15.0 million
  4. DDeficit of USD 25.0 million

Explanation

Assets grow to 80 x 1.06 = 84.8. Liabilities grow to 100 x 1.05 = 105. Deficit = 105 - 84.8 = 20.2? Recheck: 105 - 84.8 = 20.2, so the closest is not 17.0; the correct computed result is a deficit of USD 20.2 million, which is not listed exactly.

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