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Strategic Risk Management: A Practical Guide to Portfolio Risk Management by David Iverson

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CHAPTER 18

Case Study 2—DC Member Investment Choice Fund

Mr. Beech is chairman of Capital Motors Pension Plan (CMPP). CMPP is a defined contribution (DC) plan, established with the principal objective of providing members with benefits on retirement from Capital Motors. The plan caters to all current employees and retirees of Capital Motors, and membership is compulsory. There are five trustees of the plan, and the trustees decide the suitable investment strategy options from which the members can choose for their retirement accounts.

PLAN CHARACTERISTICS

Some key characteristics of the plan are shown in Table 18.1.

Table 18.1 Asset Allocation

Asset Class Balanced Option Growth Option
Growth Assets
Domestic equities 25% 35%
Global equities 10% 20%
Domestic real estate 5% 5%
Income Assets
Domestic fixed income 45% 30%
Global fixed income 10% 5%
Domestic cash 5% 5%
Total 100% 100%
Risk–Return Characteristics
Expected return (% p.a.) 6.1% 7.0%
Volatility (% p.a.) 7.1% 10.8%

The total allocation to growth assets of the growth option, is 60 percent, with a strong bias to domestic asset classes. The global real estate portfolio is largely publicly listed real estate investment trusts.

As shown in Table 18.2, the demographic profile of the plan's membership shows that more than half of the members are younger than 40 years old. About 10 percent of the members are retirees.

Table 18.2 Demographic Profile

Age Percentage
20–29 34%
30–39 24%
40–49 ...

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