Iowa State University Floy Enterprises Pension Simulation Worksheet

Question Description

To accomplish this assignment, you will need to simulate the solution. I suggest using Frontline’s Premium Risk Solver platform. You can download and install Frontline Premium Risk Solver at www.solver.com. If you have a different simulation package you would prefer to use, feel free.

Problem

You have been hired to help Floyd Enterprises determine how much to contribute to their company’s pension plan. They use a ten-year planning horizon to determine the contribution, which, if made annually in next 10 years, would allow for only a 10% chance of the fund running short of money. The company then makes that contribution in the current year and repeats this process in each subsequent year to determine the specific amount to contribute each year. Last year, the company contributed $23 million to the plan. The pension plan covers both hourly and salaried employees.This year, 6,000 former hourly employees and 3,000 former salaried employees are receiving benefits from the plan. The changes in the number of retired hourly employees from one year to the next is expected to vary according to a normal distribution with a mean of 4% and a standard deviation of 1%. The change in the number of retired salaried employees from one year to the next is expected to vary between 1% and 4% according to a truncated normal distribution with a mean of 2% and a standard deviation of 1%. Currently, hourly retirees receive an average benefit of $15,000 per year, and salaried retirees receive an average annual benefit of $40,000. Both of these averages are expected to increase annually with the rate of inflation, which is assumed to vary between 2% and 7% according to a triangular distribution with a most likely value of 3.5%. The current balance in the company’s pension fund is $1.5 billion. Investments in this fund earn an annual return that is assumed to be normally distributed with a mean of 12% and a standard deviation of 2%. Create a model for this problem and use simulation to determine the pension fund contribution the company should make in the current year. What is your recommendation?

Turn in your simulation file, whether it is a spreadsheet, R script, etc.

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