E-LEARNING MODULE

ERM Module
Section 2: Introduction to Enterprise Risk Management

Activity: Pension Life Cycles

There are many companies whose largest liability is their United States, the future solvency of the firm is at risk.
defined benefit pension plan. When the assets backing
Below is a graphic labeled Pension Plan 2 from the
the pension plan are volatile, and especially when they
“From Pension Risk Management to ERM” article you
reduce in value, the pension expert is asked to help
just read. Review the graphic below, and then answer
merge the plan’s expected life cycle with that of the
the questions on the next page.
firm. When this coincides with a poor business cycle for
their business, as with the auto manufacturers in the

erm_s2-12_PensionLifeCycleActivity.doc Copyright ©2012 by Society of Actuaries 1

Activity
Based on the labels (A, B, C) in the above graphic,
where in the life cycle would you locate each of com-
panies described below?
 Century old firm that is struggling to stay solvent. Its
defined benefit plan was added through negotiation
in 1970.

Choose A, B, C or None of the above.

 Technology firm started five years ago with most

employees younger than 40. The company has had a
defined benefit plan since incorporation.

Choose A, B, C or None of the above.

 Discount retail store started in 1960 and still grow-

ing at a double-digit pace. The company added a de-
fined benefit plan in 1970.

Choose A, B, C or None of the above.

Once you have answered each question, compare your

answers to the solutions to the next page.

erm_s2-12_PensionLifeCycleActivity.doc Copyright ©2012 by Society of Actuaries 2

Activity Answers
 Century old firm that is struggling to stay solvent. Its
defined benefit plan was added through negotiation
in 1970.

The answer is C. The fast maturing defined benefit plan for

this firm is hurting its competitiveness when it can least afford
it.

 Technology firm started five years ago with most

employees younger than 40 years old. The company
has had a defined benefit plan since incorporation.

The answer is A. The defined benefit plan is immaterial to

the bottom line of the business at this point in time.

 Discount retail store started in 1960 and still grow-

ing at a double-digit pace. The company added a de-
fined benefit plan in 1970.

The answer is B. This growing company is not too worried

about its defined benefit obligations yet, but it should be using
scenario planning to potentially hedge some of the future risk.

erm_s2-12_PensionLifeCycleActivity.doc Copyright ©2012 by Society of Actuaries 3