Hi All,
I do not understand the answer to Question 24
Even thought the plan is frozen, why would the benchmark not be the liability itself?
I understand matching the duration, but just confused here by matching the benchmark to the discount rate is not right choice?
It almost like the right answer should be a mix of the two, you could have a benchmark that matches the duration but might have a very high return target?
What am I missing here?
Bumping this thread…
Bumping this thread again, need some input here from the forum.
You have 14 years until the lump-sum payout. If you match the liability based on it’s discount rate only, you have essentially said that the liability has no risk (i.e. Duration). Thus, any fluctuation in rates can cause severe differences in the surplus. Therefore, the description of a liability-based benchmark (rather than the asset-only approach) is the correct choice.
I agree thanks. I just view this to be a poorly structured question.
On one hand if you do not have a return equal to your discount rate then your plan assets will fall behind your liabilities.
One could view “selecting an assortment of asset classes that meet this required return while minimizing risk as much as possible” as matching duration as closely as possible.
You could also on the other hand match duration but have a return way lower than the discount rate, where are you then?