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Defined benefit plan has existed for a long time, form first appeared in 1928 in the U.S. and is set by the American Express Company. Currently, DB plans have different spheres of influence all over the world, but in recent years, the use of DC plans has increased. In the U.S., the assets of the DB plan at nearly $ 2.5 trillion by the end of 2000. However, in the U.S., evaluated by both the number of participants and total assets, the DC plan than outstanding. The growing advantages of DC plans in the U.S. have largely been created by the rise of 401 (k) plans in the business sector. In the UK, the traditional models DB prominence, accounting for about 4/5 of the total plan of the private sector in 2001; however, the percentage of companies using DB plans including the new members dropped 38% in 2004 from 56% in 2002. In Europe, DB plans continue to be made based on the model of the basic pension; however DC plan is slowly becoming more accepted. Japanese private pension funds have overwhelming advantages in favor of the benefits identified, but the Japanese company now also offers cash balance plan and the DC plan.

Asset retirement resources to pay for retirement benefits. Therefore, the investment performance of a pension plan should be evaluated relative to the assets of the plan and shall provide pensions; even when it is evaluated based on a total basis . Clear understanding of the pension liability is very important for the establishment of effective investment policy.

Expert of the plan sponsor is a mathematician responsible for the estimated pension liability. Along with the specific benefits identified, estimated pension liability also involves forecasting changes in human resources, determine the growth of salaries and wages, estimated capacity of the early retirement option, the applicable mortality table and other factors.

First, the specialist will determine the liability payments and the present value of it compared to the current value of assets of the list. The relationship between the value of the assets of a plan and its current debt value is called the capital of the state plan. In a fully funded plan, the ratio between the assets and liabilities of about 100% or more (the state capital is 100% or more). Pension surplus is calculated as the market value of pension plan assets minus the market value of pension plan liabilities. In a plan is not enough capital, the ratio of plan assets and liabilities is less than 100%.

There are three basic concepts debt exists in the pension plan:

• Responsibilities of accumulated benefits (ABO - Accumulated Benefit Obligation). ABO is the present value of pension benefits in the event the plan is terminated immediately and therefore responsible to fund retirement income payments to all beneficiaries during operations to fund the time of termination of (Accumulated services)

ABO excludes the impact of the increase in salaries and wages in the future

• Responsibilities of expected benefits (PBO). PBO stop the service accumulation similar to the case of ABO but compensation is expected in the future will increase if benefits are determined to be associated with a certain amount of the final payment. Therefore PBO including the impact of the compensation expected to rise and is a reasonable measure of pension liabilities for an enterprise to continue operations and has no plans to terminate their DB plans.

• General liability to pay future. This is a measure of the easiest to understand but most certainly not responsible for the pension plan. Total future liability of card defined as the present value of the accumulated value and forecasts of future service benefits, including the impact of the value of future compensation increases. Financial means can be done internally as the basic elements to create investment policies.

Insurance professional mission is to determine the division ratio of debt plan members and retired employees. This distinction indicates two important factors:

• Because the people who are receiving retirement benefits, if the number of people who retire more and more in larger monthly cash flow, therefore, the liquidity requirements of the higher retirement. The rate of debt retirement related to employee retirement period is retired; related to people who are in the stage of labor is the labor time is.

• Do the same mortality table used for plan beneficiaries are retired workers and a greater rate plans who retire with a shorter average duration calculated future pension liabilities.

We move on to the construction of the factors in the investment policy for a DB plan.

2.1.1. The objective of risk in the process of building target risks, plan sponsors must consider the status of the plans, financial position and profit of the donor, the overall risk of the donor and retirement experience, a description of the plan, the characteristics of the labor force, as shown in Table 3-1. (The ability to take risks, broadly speaking, is the willingness and ability to take risks)

Identified in Table 3-1 should be a comment. In principle, a retirement plan can provide enough capital to withstand a certain degree of negative profit without affecting the payment of debts of the plan assets is due to the redundancy capital surplus of the plan. Therefore, the ability of donors to predict the risk increases with investment capital situation, however, may not need to do so. A plan is not enough capital may increase the willingness to accept the risk of donors to provide sufficient funds for the plan; however, nor other cases, a lack of capital are less likely to plan accept more risk because of lack of risk capital appeared right from the start. Therefore, a lack of capital plan should reduce the willingness to take risks.

a plan may not provide sufficient funds, plan sponsors have a responsibility to contribute to the plan. Financial condition and profitability may affect the ability and willingness to contribute as needed. When the donor is in poor financial condition, this reduces the ability to provide the missing money which suddenly due to some unfavorable investment. In addition, as a result of donor activities dependent on benefits of retirement income, the level of contribution to the pension fund as a result of donor activities is not effective. Historically, in some countries such as Germany and the United Kingdom, the DB pension fund is not established private institutions and pension liability for the book on reserve in the balance sheet of a company. However, the European Union required that listed companies in the EU where applicable International Accounting Standard System before 2005 (or 2007 in some cases) is one of a number of efforts to make reduce the differences between countries.

Some backup plan can facilitate plan members have the option to speed up the payment of benefits, reduced tolerance for risk or other measures similar to the above. More elderly labor force that is responsible for short-term and higher liquidity requirements mean risk tolerance is generally lower. Moreover, for a plan with more elderly labor force, if the plan becomes undercapitalized, the company will also have less time to engage and capital contributions to the plan.

The main purpose of the DB pension fund assets is to ensure the solvency of the fund. This is a common feature of DB plans and insurance companies and banks, as we will discuss in the next section. For all of these investors, the relationship between risk and debt management is very important and the ratio of assets / liabilities in terms of risk and investment is the main concern.

Rate management asset / liability as part of the overall risk management of the company, which focuses mainly on the financial risks created by the interaction between assets and liabilities; against financial liabilities certain management rate assets / liabilities include asset management to control the relative value of assets over liabilities. For a DB plan, a key concept in the management rate assets / liabilities pension surplus, is defined by the market value of pension assets minus the present value of pension liabilities. DB plans can articulate an objective risk in relation to the rate of change of the pension surplus (e.g. standard deviation). Another objective risk in the management rate assets / liabilities related to risk capital deficiency placed in relation to the plan's liabilities. (Capital deficiency risk is the risk that the value of the portfolio falls below the acceptable level for a certain period of time, it is also known as identity). Risks inherent deficiencies related to the achievement of:

• The state capital of over 100 percent (or some other) for ABO, PBO, or the total value of future debt.

• What is the state capital on a certain percentage make sure to avoid having to report pension liabilities on the balance sheet under certain accounting standards.

• What is the state capital on a certain level required. For example (in the U.S.) includes:

The percentage required in Retirement Income Security Act of 1974 (ERISA) give rise to requests for additional contributions.

The required rate levels that ensure pension benefits Association requirements also require the difference to pay additional money.

Other objectives that may affect the target risk consists of two objectives stated in pension contributions in the future:

• Reducing the level of variability of future contributions this year after year.

• Reduce the rate to make additional contributions in the future, if the donor does not contribute because the plan has sufficient funds.

The tax factors set out in chapter 4 to interact with each other a lot. For example, for a plan to maintain its capital status, the project sponsor may need to increase contributions. Priority ranking of the risk factors is a step in creating objective of financing risks. In addition to the relationship between objective risk with creditors and contributions (which are the characteristics of the investment plan DB), donors can raise the overall risk objectives, as well as with the other forms of investment. In short, the state's capital plan, the financial condition of the donor, the characteristics of the plan and the characteristics of the labor force are the factors that affect the ability to take risks and the construction of the objective risk. Project sponsors can set a target of specific risks related to the lack of risk capital, risks associated with the contribution as well as the total risk.

2.1.2. Target profit target profit general a DB pension plan is to achieve profitable enough to carry the responsibility of pension payments have been adjusted additional elements inflation. In the process of setting profit targets, pension plan sponsors can also specify the specific profit target number. A pension fund must fulfill their responsibilities. For a DB pension plan, profit requirements (in the context of the need to plan profits averaging) depends on many factors, including the state's current capital plan and close pension contribution in relation to the accumulated pension benefits. If retirement assets equal to the present value of pension liabilities and if if the rate of return generated on the property equal to the discount rate used to calculate the present value of the debt, the pension assets just enough to pay for the debt maturity Therefore, for a pension plan sufficient capital, portfolio managers should decide on the level of profit required starts with determining the discount rate deduction used to calculate the present value of pension liabilities. For example, the discount rate can be a long-term government bond rate

Profit expectations raised by pension funds may be higher than the fund's profit requirements, in some cases reflect concerns about future pension contributions or future retirement income:

• Profit objectives relating to future pension contributions. Ambitious or "targets spread" of any DB plan sponsors do is to make future pension contributions equal to 0. A more realistic goal is to reduce future pension contributions when calculating whether or not the discount factor.

• Profit objectives related to pension income. The system of U.S. accounting standards (GAAP) and international (IAS) have raised the standard retirement cost recorded in the report production and business activities of the project finance business. The above principles are opposite each other - that is, a good plan with the state capital may be in a state of negative pension costs (for example, retirement income). In the period of the financial markets operate efficiently, a large amount of business retirement income will contribute a significant part of the total net income set forth in the report's production and business activities project finance business. A donor in this case the goal is to maintain or even increase retirement income.

Only if the ability to accept risk increases with the duration of the pension liabilities, in general, the expected profit will increase - in a practical limit. For example, if the plan has a young labor force and growing, donors can set a profit target positive than a plan was closed to new members and are the with great liquidity requirements.

One thing worth noting is that the plan sponsor can manage investments for asset ratio of the labor force is the total pension liabilities according to risk and profit targets looking for differences with the percentage of the assets of retired members. Retirement benefits of members can be fixed in nominal terms - for example, based on the final salary of an employee. For assets related to these liabilities, profit targets and risk may be more cautious than the assets related to debt payments to current employees because of this debt will increase with inflation.

2.1.3. A pension fund liquidity requirements DB pension contributions from donors and funds to pay benefits to the retired member. Net cash outflows (payments minus pension contributions pension) create liquidity requirements of a pension plan. For example, a pension fund to pay benefits pension of $ 100 million a month on total assets of $ 15 billion, and did not receive any contribution retirement from donors, there may be liquidity requirements annually in about 8% of the total assets of the plan. During the year, total assets should be increased to $ 16.2 billion in order to meet the payment requirements without affecting the value of assets. The following factors affect the liquidity requirements of a DB plan:

• The number of retired members more and more, the greater liquidity requirements. For example, a company operating in an industry are going to be able to rate the growing retired member requires a growing liquidity requirements.

• The contribution of the business in relation to interest payments less the greater the liquidity requirements of the fund. Requires the contribution depends on the status of the capital plan. For donors to contribute regularly, a young labor force and growth in the number of synonymous with liquidity requires less than an aging labor force and is in a downtrend.

• Characteristics of the plan as early retirement option and / or selection of retired pay benefits only once, the ability of higher liquidity needs.

2.1.4. Term investment period of a DB plan depends on the following factors:

• Is a plan to continue to operate in the long term or the termination of the plan was expected.

• The age of the labor force and the rate of labor member. When a young labor force and labor members are the majority and when DB plans continue receiving member, the duration of the plan will be longer.

The total duration of many DB plans continue to operate as long. However, this period can be divided into several stages: for employees who have not retired, plan period is the average time until the usual time of retirement; while for those who retired members, term plans are calculated based on the average life expectancy of these employees.

2.1.5. From income tax and capital investment increased recognition of private DB pension plans generally are exempt. Therefore, the plan investment decisions in the context of a specific plan usually do not care to factor taxes. However the contribution of the business activities related to tax issues as well as the termination of the plan and form of payment to the beneficiary while the pension fund's investment activities not related to DB tax. However, Example 3-6 illustrates a case where the tax issues arising.

2.1.6. All legal issues pension plans are regulated by the laws and regulations affecting the investment policy. Almost all countries that allow or offer of private investment portfolio are set out some of the legal framework on the structure of the fund or plan. In the U.S., the business plan and the plans many employers are governed by ERISA, but the plans of the government, local or union is not under management. In the U.S., union pension plans are regulated by the Labour Code Taft-Hartley. An important aspect of ERISA is that it eliminates the local government and law, whereby the pension plan subject to regulation by a management agency. Both ERISA and the laws generally specify the level of concern that pension plan sponsors must ensure investment decisions.

Guardian of a pension plan is an example of a trustee - the one who has the trust and responsibility to stakeholders (from the Latin word origin - fiducia - meaning " thought "). A legal guardian is responsible to ensure assets are managed only for the benefit of the beneficiaries (for a retirement pension plan participants). Depending on the authority of his guardian under legal supervision as they perform their responsibilities. The beneficiary may be trying to overcome the losses from a guardian does not have the attention appropriate standard.

In Canada, the pension funds are managed at the local level, however, the Ontario Retirement Association management standards like ERISA arguable. In the UK, the operation of the Freedom of Association and Myner Association in recent years has become standard policy to guide investment. European countries such as the Netherlands; Asian countries including Australia, Japan, and Singapore;, and other Latin American countries such as Brazil, Chile and Mexico, she is an example of the countries have a legal framework for retirement benefits of employees and savings plans.

Historically, in some developed markets, structured pension plan does not include having to deal with the investment policy issues. For example, France has a plan run by the government requires donors to plan contributions. But outside the country in which the plan which are not used, it is important for businesses to understand and apply the rules of the government agency in charge of developing the investment policy.

2.1.7. The special case Although the special cases can hardly be generalized description, a trait that the retirement plans of small companies face issues related to human resources and sources finance available to plan sponsors. In particular, investment in alternative investments (such as unlisted shares, venture capital funds or mineral resources) often requires special review of complexity. (Reviewing especially related to the investigation and analysis to support an activity or investment recommendations; failing special review activities, in some cases leading to legal liability, depending on the system different legal systems.

Another special case of a plan can be subjective when not to invest in some specific industries that are the matter of ethics or welfare; or invest in shares of companies operating in the country against the regime with a number of ethical issues were raised. Investment considerations on moral meaning play an important role in the investment policy of the state retirement plans as well as a number of private pension plans or unions. Australia and some European policies require pension funds to disclose information whether these funds put ethical standards into investment decision-making process or not. In the UK there are regulations (introduced in 1999) increasingly affect the measures of activities socially responsible investment of the pension plan.

Purpose: The purpose of the investment policy ("Policy") is to provide clear guidelines for the management of plan assets. This policy should establish policies and guidelines for the operation of the Plan's investment. Commissions have approved investment policy and apply this on 21/04/2002. The policy outlines the goals, objectives, limits and responsibilities to:

• Investment Committee, staff, investment managers and managers understand the objectives and policies of the Plan.

• The investment managers provide guidance and authority relating to the investment of the Plan's assets

• The Investment Committee is responsible for significant investment in evaluating the effectiveness of individual investment managers as well as assess the level of achievement of investment objectives.

Management plans should always be based on all the laws and regulations of state and government, including / not limited by the Retirement Income Security Act of laborers of 1974 (ERISA).

Regulations on the duties and responsibilities of investment. Commission-based investment company employees as well as external service providers (including the head of investment banking and guardian) in performing their duties. Guardian role of each organization must be clearly defined to ensure clarity in communication, performance and level of responsibility in all aspects of operations.

Investment Committee. Investment Committee is responsible for the investment management process. With the help of the staff, the investment committee monitoring the effectiveness of investment; ensure funds are invested in accordance with Company policy; research, propose and implement policies and operating procedures will enhance the operation of the Plan's investment.

Chief Investment Officer. The Chief Investment Officer will build and manage the portfolio in accordance with the philosophy and principles of investment. They traded securities and asset restructuring within the guidelines set out. Investment Committee believes that investment decisions are best made when not constrained by the limits too wide. Therefore, the investment manager delegates full authority to comply with the investment policy limits were clear instructions. However, investments managers must respect and follow the limited instructions, specific attitudes and philosophies have been raised in any of the investment guidelines in effect or any additional material no. The investment managers are expected information, in writing, any change could affect the list of plans for Investment Committee within five working days after the incident. Examples of such events include, but are not limited to, the following changes:

• A significant change in investment philosophy.

• A change in the ownership structure of the business.

• The loss of one or a number of key management personnel.

• Any incident that may affect leadership, professionalism, integrity, or financial condition of the business.

Bank guardian. Guardian Bank holds all cash and securities (except those held in mixed funds and mutual funds) and will often synthesize these assets held for investment committee approval. Moreover, the bank guarantee in a bank or trust will be used to accept and hold cash before allocated to investment managers and to invest this money in financial instruments interest and high liquidity.

Investment goals and objectives. General investment objective of the Plan is to create resources to pay benefits to members beneficiaries of the Plan through an investment program planned and implemented carefully.

Profit target

The overall profit of the plan is to be an amount sufficient to generate an appropriate amount of capital additional elements inflation. The appropriate amount of capital gain if the market value of the assets at least equal to the financial responsibility expected of the Plan as defined in accounting principles 87 and is calculated by the actuary of the Plan planning. Plans to target a total return of 7.5% a year. Moreover, the Plan has the following major objectives:

• Plan assets must be invested to maximize profits based on the risk level set.

• The plan must try to achieve a higher profit margin on average, are set from the different indicators for each type of investment, in which the proportion of the index represents the rate allocation is expected of investments over a period of 3 to 5 years.

The objective of risk:

• The assets of the plan should be diversified to minimize the risk of large losses in one asset class, investment style, investment sector, maturity or geographical location, these are the factors that can reduce the ability to achieve the necessary amount of capital of the Plan as well as long-term investment purposes.

• The assets of the plan must be invested so that the risk that the market value of assets falls below 105% of the financial responsibility for that year is 10% or less.

Limitations:

• Assets plans to maintain a reasonable level of liquidity to pay benefits to the beneficiaries responsibility. Plan now and in the near future liquidity requirements at least.

• plan assets to be invested so that appropriate investment in the long process

term of the Plan

• A tax-exempt investors, plans to invest assets with a focus on total return receipt is not distinguished from regular income or from the market value of the property increases.

Planning approval: Investment Committee will review quarterly investment efficiency. The investment policy will be reviewed annually or more frequently if there are major changes in laws and regulations, major changes in the state's capital plan or capital market conditions.

Asset allocation: The Committee has the Investment Committee believes that the level of risk identified by the Plan is determined mainly by active asset allocation strategy of the Plan summarizes the factors that should be considered during identifying long-term investment asset allocation as:

• The term of the Plan

• What is the state's capital plan.

• the financial condition of the business.

In the process of establishing the rate of long-term asset allocation plan, the investment committee will consider prudent long-term expectations of the capital market to determine the expected return, the level of change and relationships between asset classes. Rate strategic asset allocation of the Plan will be made by the Investment Committee in each document separate asset allocation strategy.

Rebalance: Investment Committee is responsible for asset allocation decisions for the plan and will meet to consider and approve the allocation depending on the financial situation, but at least once every 3 years. Investment before the Commission to change the asset allocation, the portfolio must be balanced in each period when the market value changes. Investment Committee has delegated to the staff this task of rebalancing. After the plan has achieved the target stock allocation, the allocation of securities must be balanced against the objectives quarterly stock index using tools. Every year, active asset allocation for the investment managers will be balanced based on the initial profit target. The staff will report on the activities rebalancing the investment committee.

2.1.8. Enterprise risk management and investment activities of the DB pension fund assets.

A DB pension plan likely a major influence on the financial performance of the business financing plans, so the research on the investment activities of DB pension fund assets in relation to pensions and the objectives of the enterprise has appeared widely. In fact, we can draw some comments from observers. In terms of risk management, there are two important issues are:

1. Pension investment management in relation to the normal investment activities.

2. Contact the pension investments with pension liabilities.

To explain the first problem, in Figure 3-1, we get the relationship between the performance of the business sponsor and the return on pension assets is a factor to monitor in the assess the level of risk. We explained that if the weaker the relationship, the greater the level of risk, and vice versa. Assume that enterprise risk and risk retirement portfolio positive contact with each other, a high level of operational risk will tend to limit the amount of your retirement portfolio risk and vice versa. Although we are interested in The investment policy, our vision will be complete if we consider the different aspects of building a retirement portfolio. A question related to the issue on whether a retirement portfolio to diversify risks related to the business activities of donors. In addition, a list of risk diversification activities of donors will increase the likelihood that donors need to increase the contributions to the implementation of the responsibility to pay for retirement, donors will be in the state can afford. Consider a stock portfolio is managed actively with a large amount of assets invested in the field of information technology. Such a portfolio will be less risky for a project sponsor activities in the field of production of consumer goods capital relationship quite small with the field of information technology, rather than a financial support activities in areas related to information technology (such as a DSL equipment provider for a phone manufacturer)

For the second problem, the relationship, the goal of the management plan is to increase the likelihood that pension plan assets will be sufficient to fund operations to pay retirement benefits to request additional contributions minimum from donors. For a pension plan sufficient capital, the objective is to maintain the status of the plan (pension surplus) in relation to debt retirement. Although both problems are consistent look from the perspective of risk management, comprehensive approach to the management of rate assets / liabilities to portfolio construction has emphasized the management of investments in relation to the debt. From ALM perspective, the characteristics of risk in the investment policy must be described in relative terms. The key change from the expected variation of surplus pension assets to pension and abilities related to the expected level of the state capital in an appropriate time frame. In fact, we can use tools such as modeling to explore whether certain portfolio can be expected to satisfy the goals that the relative risk. Variability of the pension surplus is small if the change of the value of plan assets proportional to the change of pension liabilities. Because the pension liabilities sensitive to interest rate changes, plan sponsors emphasize that aspect ALM tend to be more beneficial when using multiple rate-sensitive securities (especially left shares).