Yes. I noticed that. I put Pension with higher ability too. There are many problems with the foundation: they put too many restrictions in their investment policy, they have little asset and the only one managing it is part-time. Pension is relatively in better position. BTW, another question about this foundation - investing a $2.5 million PE or something out of 10 million? What was the answer for that? I I think put NO to this because it reduces the ability to diversify significantly.
^ that investment would have violated their constraints. So no.
i put that pension had higher ability, but foundation had higher willingness. For willingess, i cited that fact that the pension fund is currently 100% in bonds which indicates risk aversion by the plan sponsor. For the $2.5 MM i believe that would have violated the 5% maximum core holding restriction in the IPS.
was it willingness or ability? I recaly willingness to take risk being asked…
Foundations have not liabilities where as pensions do so foundations have the ability for a higher risk tolerance. think about it people.
the foundation had a 5% draw down annually plus a mandate to match inflation. The pension plan has a health sponsor who is willng and able to shovel money into it when needed. The pension plan has much more ability to take on risk IMHO.
Buckhead Wrote: ------------------------------------------------------- > the foundation had a 5% draw down annually plus a > mandate to match inflation. > > The pension plan has a health sponsor who is > willng and able to shovel money into it when > needed. > > The pension plan has much more ability to take on > risk IMHO. you must not have read the cfai reading on the institutional investor.
engineer2finance Wrote: ------------------------------------------------------- > was it willingness or ability? I recaly > willingness to take risk being asked… I recall willingness as well, which I think was the key to the question. The foundation would have more ability, but the way the question was worded the pension had more willingness. Critical distinction in the wording of the question. RTFQ
A pension can only take upon risk compared to its liabilities. It wouldn’t make sense for it to take more risk without taking in regard its liabilities. A foundation is a perpetual (pension is not) going concern with out real liability.
There were 2 questions: Who has more ability and who has more willingness For ability ---- I had pension fund…As fully funded, plus had extra money to contribute to Foundation plus company expecting better profitability for some time in the future For willingness – I had foundation… One of foundations committee member said, they are ready to take more risk to greater return or something like this…
Unless the wording was really weird, I Just don’t see how the pension fund can have more willingness when the plan sponsor has an ongoing pension plan fully invested in fixed income. That is as conservative as you can get.
Foundation for both questions. A pension fund has binding liablities, whereas the foundation does not. The granting is not a binding liablity. A foundation could shoot for the moon performance wise and go poof without any intervention…a pension would not have this luxury as a U.S. based (which it was) plan would be restricted by Erisa.
the foundations liabilities are technically just a factor of their market value, thus their liabilities constantly decrease with them, no chance of falling-flat or need to match their liabilities well.
Thats funny sponge bob because I agree with your statement but I get a different conclusion. The foundation was supposed to be a permanent endowment, but it had no guarantee of future funding, whereas the pension plan HAS a guarantee of future funding. Therefore the pension plan can actually take more risk, because they can count on getting bailed out.
I thought it said pension was fully funded (no surplus, no deficit). If the pension had a surplus it could have return objective to grow the portfolio thru long-term cap gains but if fully funded wouldn’t the objective be an ALM approach. Therefore foundation with only constraint being the 5% spending + manage fee + infl have more risk taking ability?
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > Foundation for both questions. > > A pension fund has binding liablities, whereas the > foundation does not. The granting is not a > binding liablity. A foundation could shoot for > the moon performance wise and go poof without any > intervention…a pension would not have this > luxury as a U.S. based (which it was) plan would > be restricted by Erisa. Same here. Another reason why pension had lower ability, the question specifically stated it had retired and active lives. It may have higher ability compared to other pensions, but I just don’t see how it could have higher ability than a foundation (perpetual life and still able to raise funds).
What happens if the foundation ends up going broke? Nothing. What happens if a Pension fund gets into serious trouble? The Pension Guarantee Corp takes it over and the tax payers essentially bail it out. Foundations are not regulated, pension funds are heavily regulated. I’m sorry, but the story about the strong company backing the pension fund was bait. There is just no way even and over funded pension fund has the ability to take more risk than a foundation.
i hate to concede but you are probably right sponge.
I spent time waffling with the answers, if it makes you feel better. They definitely like to paint another choice (comments about continued funding, versus 1 time with no others etc). Take comfort that most all of us had issues with the same questions across the exam.
Agree with Sponge. Felt it would be a hard case to prove the pension had higher tolerance than a foundation. Didn’t see enough strong evidence to justify, didn’t even indicate a giant surplus which would have made a stonger case, just fully funded which could change quickly.