Practice question 1ii) on page 530 of reading 15 suggests that an underfunded DB plan has low risk tolerance because substantial loss due to risky plays could further jeapardize the funded status.
Since DB plans generally have long time horizons, shouldn’t they generally have high risk tolerance?
A DB plan’s return requirement is equal to the discount rate used to calculate the PV of its liabilities. I don’t think its fair to say a DB plan has a long time horizon and therefore has a high risk tolerance.
Many factors will affect the DB’s ability to take risk including its funded status (over funded = increased ability to take risk: think contingent immunization), provisions for early retirement options (early retirement / lump sum options = increased liquidity requirement & reduced ability to take risk), open/closed status (closed = no new contributions being made, and thus reduced ability to take risk), share of active lives vs. retired lives, inflation adjustments, etc.
Except, of course, when it isn’t.
Fair enough