The question implies that the current DB pension’s funded status is underfunded. (PA £8.88b < PBO £9.85b)
There are 2 IPS to choose upon.
IPS X’s return requirement : Plan’s objective is to outperform the relevant benchmark return by substantial margin.
IPS Y’s return requirement : Plan’s objective is to match relevant benchmark return.
The answer is IPS X. And the answer states as below.
“IPS Y has the appropriate return requirement for Worden’s pension plan. Because the plan is currently underfunded, the manager’s primary objective should be to make it financially stronger. The risk inherent in attempting to maximize total returns would be inappropriate.”
What I don’t understand is that if the DB pension’s status is underfunded, then they will not be able to meet the pension liability thus need to outperform the relevant benchmark return so they can at least meet PA = PBO. What am I missing?