American Cruise Lines (ACL) is a leading global cruise ship company with few major
competitors and a market capitalization of $10 billion. The assets of the ACL Defined Benefit
Pension Plan (ACLP) have a current market value of $100 million. Using a 5 percent discount
rate (the current yield to maturity on a long-term U.S. Treasury bond), ACLP’s actuary
calculates the value of its Projected Benefit Obligation to be approximately $100 million with a
duration of 15 years. ACLP has an early retirement feature which includes annuity and lumpsum
pay-out options for long-term employees over 50 years old. Few employees are currently
planning to retire early. ACLP is directed and managed by an independent investment
committee that is subject to a fiduciary obligation to act in the best interests of its beneficiaries.
ACLP’s investment committee has recruited Emily Wilson, CFA, to manage ACLP’s investment
portfolio. Wilson conducts research on ACL and concludes the company is financially sound
with a stable workforce. Compared to the averages for the cruise industry, ACL has a lower
debt/equity ratio and a higher return on equity.
Wilson prepares Exhibit 1 which summarizes the workforce characteristics of ACL and the
cruise industry.
Exhibit 1
Comparison of ACL and the Cruise Industry
Workforce Characteristics ACL Cruise Industry
Average
Average age of active employees 33 years old 40 years old
Active long-term employees over age 50 14% 17%
Active employees/Retired employees 85% /15% 90% /10%
Wilson meets separately with ACLP’s investment committee and with ACL’s President John
Johnson to listen to their ideas on ACLP’s investments.
Investment Committee: “Our investment objective is to build a pension surplus in ACLP by
setting a return objective that is 200 basis points above ACLP’s
minimum required return. We have determined that this investment
objective is consistent with ACLP’s current risk tolerance.”
Johnson: “In today’s environment, ACLP should be able to produce
returns of at least 10 percent per year.
In addition, according to industry analysts, the increasing
popularity of cruises should translate into increased growth and
profitability for the cruise industry over the next 10 to 15 years.
The investment committee should increase ACLP’s investment
in cruise industry equities from its current level of 10 percent to
at least 15 percent of plan assets.”
Wilson’s first task is to draft an ACLP investment policy statement (IPS) to present to its
investment committee.
A.
Formulatethe return objective of an IPS for the American Cruise Line’s Defined Benefit
Pension Plan (ACLP).
Showyour calculation.
(3 minutes)
B.
Indicatewhether ACLP has a below-average, average, or above-average ability to take
risk compared with the average for the cruise industry with respect to
eachof the
following risk factors:
i. Sponsor financial status and profitability
ii. Workforce age
iii. Retired employees
Justify
eachresponse with
one
reason.
Answer Question 4-B in the Template provided on page 29.
(9 minutes)
C.
Indicatewhether
each
of the following factors increases, leaves unchanged, or decreases
ACLP’s ability to take risk:
i. Sponsor (ACL) and pension fund (ACLP) common risk exposures
ii. Retirement plan features
Justify
eachresponse with
one
reason.
Answer Question 4-C in the Template provided on page 30.
(6 minutes)
D.
Formulate
eachof the following constraints in ACLP’s investment policy statement:
i. Liquidity requirement
ii. Time horizon
Justify
eachresponse with
one
reason.
Note: Your answer should specifically address ACLP’s circumstances.