Fundamental of Retiree Group Benefits Questions

[jh]

P181, example 6, in Example 4, the market related value of assets at BOY was equal to 110,000 - how was this calculated?
Was it an given?

If it's a given,

Why is the expected return 55,000*0.08-10,000*0.08*.5?

[James Madison]

Jh,

I think Example 6 should say:
The market related value of assets at BOY was equal to $55,000.
The expected benefit payment is $10,000.
The expected benefit payment is made on July 1.
Expected rate of return is 8%.

Hence, Expected Return on Assets = 55,000*.08 – (10,000/2)*.08 =4,000.


I think the $110,000 is extraneous and a mistake. See Yamamoto’s old FAS106 paper to see why I say this (he goofed up this example in his new book).

[Random Walk]

Same book, p. 277.

In the chart of "Age-Related Costs", why is the Relative Value for age 70 to 74 shown as 1.148 instead of (1.03)^5 = 1.159?

I have similar questions about some of the other Relative Values in this chart.

Also, I think there's a typo three lines after this chart. He says "(3.0 or 0.5 percent by year)" when I think he means "(3.0 or 1.5 percent by year)" Can anyone confirm?

Thanks.

[James Madison]

Random Walk,

1. Assume he meant 1.5% from age 75 onward.
Do you get relative value factors of:

1.03^0=1.000
1.03^5=1.159
1.03^7.5*1.015^2.5=1.296
1.03^7.5*1.015^7.5=1.396
1.03^7.5*1.015^12.5=1.504
1.03^7.5*1.015^17.5=1.620
Weighted Ave=1.210304

Do you agree that the plan costs then become 1652, 1916, 2141, 2306, 2485, and 2677.

2. If you assume he meant no cost increases after age 85 (this is the best literal interpretation of the premise of the example) then the relative value factors become:

1.03^0=1.000
1.03^5=1.159
1.03^7.5*1.015^2.5=1.296
1.03^7.5*1.015^7.5=1.396
1.03^7.5*1.015^10=1.449
1.03^7.5*1.015^10=1.449
Weighted Ave=1.206395
The plan costs then become 1658, 1922, 2148, 2314, 2401, and 2401.

3. Assume he meant 0.5% from age 75 onward and the plan costs become 1693, 1963, 2140, 2194, 2249, and 2306.

Do you agree with the above solutions to this apparently flawed question?

[Random Walk]

2. If you assume he meant no cost increases after age 85 (this is the best literal interpretation of the premise of the example) then the relative value factors become:

1.03^0=1.000
1.03^5=1.159
1.03^7.5*1.015^2.5=1.296
1.03^7.5*1.015^7.5=1.396
1.03^7.5*1.015^10=1.449
1.03^7.5*1.015^10=1.449


I calculated the relative value factors as in your second example.

Based on this thread, it appears that the examples in Fundamentals of Retiree Group Benefits were not proofread very well. I wonder if this makes it more or less likely that calculation problems based on this material will appear on the exam?

[James Madison]

I was thinking what you were thinking. The error makes it less likely that this will be asked on the CSP exam.

They’ve asked an age related claim cost question before on the 2004 8G exam (problem # 10).