Shire Manufacturing and Shortfall Risk - 2013 Question 7

[archived_user]

Question is asking why Vermillion would have a lower shortfall risk than Shire. I understand their solutions but I would also include Age. Average age at Vermillion is 39 compared to 44 at Shire.
I said the average age is younger for Vermillion than other company. Therefor duration of liabilities would be greater and therefor the shortfall risk would be lower.
This wasn’t included in solution.
Any help is much appreciated.
Thanks,

 

[archived_user]

This is directly from the reading … (Page 439 in my book (Under Apex Example 1)
“Shortfall risk is the risk that portfolio value will fall below some minimum acceptable level over some time horizon; it can be stated as a probability.) Shortfall risk may relate to achieving:
■ a funded status of 100 percent (or some other level) with respect to the ABO, PBO, or total future liability;
“a funded status above some level that will avoid reporting a pension liability on the balance sheet under accounting rules; and
a funded status above some regulatory threshold level. Examples (in the United States) include:
● levels under the Employee Retirement Income Security Act (ERISA) that would trigger additional contribution requirements; and
● levels under which the Pension Benefit Guaranty Corporation (PBGC) would require additional premium payments.
Other goals that may influence risk objectives include two that address future pension contributions:
■ Minimize the year-to-year volatility of future contribution payments.
■ Minimize the probability of making future contributions, if the sponsor is currently not making any contributions because the plan is overfunded.”
If this above “Age” factor does not contribute to any of these – (DIRECTLY, and I emphasize directly) please DO NOT INCLUDE IT…

 

[archived_user]

Thanks a bunch. That’s a tricky one. I would’ve included it and a lot of candidates probably did.
Much appreciated for the in depth response.