Ok, i get the “shorter duration of liabilities” argument… but given a plan that either will have new participants, or not have new participants, i would think the addition of new participants would increase PBO as there will be more wages to discount (in both real, and nominal terms too). If a plan is closed, they cut off the amount of their liabilities to those already in the plan, the aging of current participants is going to happen whether the plan is closed or not. Yah, if it’s closed, as people age you will have more retired lives because your adding less new people, but those new people would have a higher PBO attached to them anyhow. I see the argument, but i’m not sure I agree, am I off my rocker on this one?
you would have more retired lives - but NO new people. (since no new additions are being made). so in terms of addition to the plan - yes more PBO is being added - but it is a known number - so the Organization can plan for the amount of addition. It is a known salary amount for 1 fewer year… less uncertain, so less risky.
CPK - I should have been more clear The answer states that closing a plan to new participants decreases ability to take risk, because the time horizon shortens.
I think this is due to *weighted average of risk tolerance* of active and retired lives that gives an open plan more risk tolerance. If you assume all are retired and plan is closed, the risk tolerance is low, the retirees can’t tolerate missed pension payments, and employer is generally done with contributions. But as soon as you re-open this plan and throw in new twenty-somethings …the employer has to make contributions towards new young employees, and those new funds (remember there is no segmentation, its pooled $$) can give additional assurance to the retired lives that their pension payments won’t be missed.
I guess my point is, whether the plan is closed or not, you have the same number of inactive participants (albeit different proportion if your adding new ppl). I only see upside by not including new participants.
markCFAIL Wrote: ------------------------------------------------------- > I guess my point is, whether the plan is closed or > not, you have the same number of inactive > participants (albeit different proportion if your > adding new ppl). > > I only see upside by not including new > participants. Not really. In a closed plan, you are marching towards the liabilities with the liabilities staying where they are. In an open plan, you are marching towards the liabilities but the liabilities may also be marching ahead because younger participants (younger than the average age of the plan participants) may get added. So your risk tolerance decreases in a closed plan.
Yah, but in your example that open plan still has the same absolute number of inactive participants as it would if it was closed, only the proportions change. It’s not like those liabilities suddenly get extended if you add new people, it’s just that it appears there are less because the proportions shift. I don’t get how that reduces tolerance.
Your time horizon just shrank, that alone reduces risk tolerance.
ok so are we going to claim the same for frozen plans too, where benefits stop accruing? I fkn hope not…
Pls how do i get the 2010 exam papers? Are they posted on the cfai site?