The guideline answer gives
“… will likely help meet such objectives as minimizing future pension obligations…”
How does exceeding the PV of today’s liabilities minimuze future contributions (and thus to-be accreud future liabilities)? If pension obligations accrue overtime, the pension sponsor still has to contibute funds to meet the new PV of the additional $ liability.
Anyone else have beef with this question?
greater asset base and surplus to earn returns on and decreases probability that the surplus will fall below 0 in the future
My thought process was that it reduces the future contributions because you are getting a higher return. This can “minimize” while you’re thinking “eliminate,” and minizimizing future contributions was a stated acceptable return objective that I’ve read before, either in schweser or the curriculum. By aiming for a return objective too low you are guaranteeing future contributions for present liabilities.
Minimize in the real world means close to or near zero. Additionally a 1% incremental gain wouldn’t “mostly” offset future accrued liabilities, it would marginally (barely) decrease the need for future contributions.
Option A for this question, “No, he is incorrect with regard to future pension contributions”
There is nothing incorrect about what he stated. “this return objective (100 bps over discount rate) could potentially minimize future pension contributions”
Choice C is “most likely” correct.
You can have Acturial discount rate to fund the liability (which is the minimum required rate). Liability is discounted at this rate.
Required return for asset is set at above + 1% in this question (They can do that because they have surplus and minimum liquidity needs). If asset achieves expected return, Surplus grows, it creates pension income and reduces future contributions.
If it said minimize future pension obligations, like the guideline answer says, i would 100% agree but it’s really impossible to justify a 1% incremental return that could potentially maybe minimize (close to or near zero) the need for future contributions.
sorry i was just guessing on Q before but actually looked up the Q this time.
the PM is trying to seek a return higher than the required return which is the return that is necessary to only sustain the current asset base and cover the expected distributions.
if the PM seeks a higher return, they will increase the asset base (and hence the funded status) and will limit the probability that they will need to make further contributions due to a fundiong deficit.
^yea I agree.
I think the wording is just too vague, contribution vs. additional contributions vs future obligations (vs PV of future olbigations - i’ve taken too many AM mock exams where the difference between right or wrong is one word in the vinette.
Time to move on, thanks for the replies.
100 bps is a lot over time. A DB plan has a long-time horizon; 10 years lets say conservatively. $100MM in assets (6%) and liabilities (5%) turns into $179MM in assets and $163MM in liabilities after 10 years.
Galli, I can tell this question grinds your gears. I have a few on this mock that piss me off, too, but don’t worry about it. All you need is 7 out of 10 points. Not gonna nail them all.
On to the next one…
The gears are about sheared off after taking this mock.
I had a question about future pension income on this question. That would refer to the plan participants correct?
My understanding is that if a DB plan becomes too overfunded the company can try to claw back some of that money, but they’ll pay enormous excise taxes and it’s usually in the best interest of both parites to allocate it to participants in the form of increased benefits.
Any ideas^^^
Yes Chuckrox8 I think that interpretation is correct.