2015 CFAI Mock PM Q35

I understand that the plan’s risk tolerance is increased by overweighting the portfolio w/ equity investments in companies in the beauty, health care, and home care industries because these industries are the same as the industries that CGI Products (the plan sponsor) has a stake in.

However, I do not understand the second consideration which states that asset liability management (ALM) has a focus on managing the volatility of the pension surplus. My understanding is that ALM focuses on managing the pension plan assets to meet the cash flow demands of the pension plan liabilities. I’m not sure how managing the volatility of the pension surplus cleanly fits into ALM. Anyone have some thoughts?



The key thing there is that there is a surplis to begin with. If you employ ALM with an existing surplus, then A and L are expected to change by the same amount, thus E stays the same (think A = L + E, E being the surplus). If the value of E were volatile, it would imply that A and L are changing by differing amounts (or directions). Thus managing the volatility of the surplus implies that you are setting the risk factors of pension assets and liabilities equal.

Funny you mention because that first question was confusing to me. It just seems strange to say that an existing allocation has an impact on risk tolerance (wouldnt the risk tolerance dictate the asset allocation). Also if they’re overweight in companies in the same sector, they would have a high correlation between balance sheet, company health and performance of plan assets, wouldn’t that dictate the manager to decrease risk tolerance? Maybe Im overthinking with this chicken / egg scenario.