Ability to take Risk when offering early retirement packages?

CFA Level III
#1

Ok so i’ve seen 3 answers to this scenario and maybe they are both correct and varies in different scenarios… Not sure though.

A Pension Plan offers an early retirement lump sum package to people over 50. How does this affect the plan’s risk tolerance?

  1. Now i’m pretty sure i’ve seen answers saying that it would increase risk tolerance because you would decrease the PBO, which is a good thing. Therefore increases risk tolerance. Now i’m sure there is something i’m missing which makes this true.

  2. The more common answer I’ve been seeing or at least recently (I feel like this is some type of bias from behavioral finance I should know sad), risk tolerance would decrease because because the time horizon / duration would decrease.

  3. I’ve also seen that risk tolerance would decrease because you’ll need liquidity to cover these lump sum payments. This is probably the least common answer and actually i’ve only seen this reason once I think. I’ve always thought to myself why I didn’t see it as an answer and I thought/assumed it would because it was never a definitive amount, you didn’t know how many people accepted the lump sum retirement.

thoughts?

#2

Completely depends on the context of the question.

We do not know if the retirement lump sum package decreases the PBO or not, depending on the sum paid up.

I’m pretty sure risk tolerance goes down, since you have a liquidity and time horizon constraint.

#3

time horizon is reduced, liquidity requirement increases. so on average tolerance decreases.

probably a lot has to do with the funded status.

i.e. overfunded it will increase.