Gwartney International:
U.S.-based Gwartney International (GI) is a financially healthy, rapidly growing
import/export company with a young workforce. Information regarding GI’s definedbenefit
pension plan (which is subject to the Employee Retirement Income Security Act
[ERISA]) appears in Exhibits 3-2 and 3-3.
In accordance with GI policy, the plan discounts its liabilities at the market interest
rate for bonds of the same duration. GI’s risk objectives include a limitation on volatility
of surplus.

Exhibit 3-2
Asset Class Actual and Target Allocation Prior-Year Total Return
Large-Cap U.S. Equities 35% 10.0%
Small-Cap U.S. Equities 10% 12.0%
International Equities 5%
Total Equities 50%
U.S. Treasurey Bills (1-year Duration) 10% 4.5%
U.S. Intermediate-Term Bonds and Mortgage Backed Securities (4-Year Duration) 17% 1.0%
U.S. Long-Term Bonds (10-Year Duration) 23% 19.0%
Total Fixed Income 50%
Total 100% 10.0%

*Income element 7.0%; price gain element 12.0%.

Exhibit 3-3
Present Value of Plan Liabilities $ 298,000,000.00
Market Value of Plan Assests $ 300,000,000.00
Surplus $ 2,000,000.00
Duration of Liabilities 10 Years
Actuarial Return Assumption 7%
GI Board’s Long-Term Total Return Objective 9%

Giselle Engle, the newly appointed CFO, must explain to the board of directors why
the surplus declined in a year when the actual investment return was 100 basis points
more than the long-term objective stated by the board.
A. Explain how the plan surplus could decline in a given year despite an actual return in
excess of the long-term return objective.
B. Explain the importance of an appropriate investment time horizon when setting
investment policy for GI’s corporate pension plan.
C. Discuss the risk tolerance of GI’s corporate pension plan.

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