Question

You are a vice president of Rensselaer Advisers (RA), which manages portfolios for institutional investors (primarily corporate pension plans) and wealthy individuals. In mid-2017 RA had about $1.1 billion under management, invested in a wide range of common-stock and fixed-income portfolios. Its management fees average 55 basis points (.55%), so RA’s total revenue for 2017 will be about .0055 × $1.1 billion = $6.05 million.

You are attempting to land a new client, Madison Mills, a conservative, long-established manufacturer of papermaking felt. Madison has established a defined-benefit pension plan for its employees. RA would manage the pension assets that Madison has set aside to cover defined-benefit obligations for retired employees.
Defined benefit means that an employer is committed to pay retirement income according to a formula. For example, annual retirement income could equal 40% of the employee’s average salary in the five years prior to retirement. In a defined-benefit plan, retirement income does not depend on the performance of the pension assets. If the assets in the fund are not sufficient to cover pension benefits, the company is required to contribute enough additional cash to cover the shortfall. Thus the PV of promised retirement benefits is a debt-equivalent obligation of the company.

Answer 1

Rensselaer Advisers (RA) is a portfolio management firm that handles investments for institutional investors and wealthy individuals. With approximately $1.1 billion under management in mid-2017

RA generates revenue primarily through management fees, which average 55 basis points or 0.55%. This translates to an estimated total revenue of $6.05 million for the year.RA is pursuing Madison Mills as a potential client. Madison, a conservative papermaking felt manufacturer, has established a defined-benefit pension plan for its employees. In this type of plan, the employer is obligated to provide retirement income based on a predetermined formula, regardless of the pension assets' performance. The pension assets are intended to cover the company's debt-equivalent obligation to pay retirement benefits, and any shortfall must be supplemented by additional cash contributions from the company.

RA manages portfolios for institutional investors and wealthy individuals, earning revenue through management fees. They are seeking to attract Madison Mills, a manufacturer with a defined-benefit pension plan. The plan guarantees retirement income based on a formula, and the pension assets are expected to cover the company's debt-equivalent obligation to pay these benefits. Any shortfall in the assets' value requires additional cash contributions from the employer.

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