2008 exam question 3, part F

3-F-i) I think the CFAI answer guide got this backwards. Could you please confirm> Wouldn’t retired-lives pool be exposed to MORE inflation risk because payments in fixed nominal terms do not adjust for inflation. And the benefit payment obligations to active-lives pool are exposures to LESS inflation risk than in retired-life pools because of accrued pension benefits include salary increases (with inflation component)? Thanks a lot!

its from the point of view of the plan sponsor having to match the liability. If plan payouts are indexed for inflation, the mgr/sponsor would need to generate a return that much higher just to match the liability.

If you are PAYING OUT amounts that ARE NOT adjusted for inflation, as was the pension fund in respect of the folks in the retired-lives pool in that question’s scenario, you WOULD NOT be subject to inflation risk in respect of those obligations. If you are PAYING OUT amounts that ARE adjusted for inflation, as will be the pension fund in respect of the folks in the active-lives pool in that question’s scenario, you WOULD be subject to inflation risk in respect of those obligations. The inflation risk picture would look just the opposite from the perspective of the employees and former employees, which is what you seem to have in mind. I think CFAI got it right.

ahh… I was thinking from the beneficiaries’ viewpoint. Thanks so much, laundybj & Captain Windjammer! That reminds me to keep the perspectives of the investment manager in mind during the exam. Thanks!

No problem dude. Good luck tomorrow. Wish me the same.

Good luck and good blessings to you both tomorrow! I know I really need it!

And also with you.

Godspeed Gents.

I got tripped up for the same issue…point of view mix up.