i seem to remember that a pension fund should not go far out on the efficiency frontier from the “global portfolio” (i may using the wrong term) if its fully funded. hence, the risk tolerance would be lower than the foundation with no specified liabilities.
Yeah I agree the comments re the fully funded status etc, was a lure. I think the answer for ability was Foundation. Willingness was definitely foundation because the pension was made up high grade corporates and governments only. Hardly risk seaking behaviour.
Parabola Wrote: ------------------------------------------------------- > Yeah I agree the comments re the fully funded > status etc, was a lure. I think the answer for > ability was Foundation. > > Willingness was definitely foundation because the > pension was made up high grade corporates and > governments only. Hardly risk seaking behaviour. Yup, it was a lure. Foundation for both.
I put Foundation. Foundation could 1) tap into principal if need be and 2) could raise more donation monies if need be. Pension fund is JUST funded. yes, Company is profitable and well placed, but the pension asset go down 1 dollar more than liabilities and we have a negative surplus. both sides of the argument have merit. tough one to call.
Dwight Wrote: ------------------------------------------------------- > 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. > 
+1 nice catch, I knew it was willingness, justified by large donation to foundation rather than adding to the surplus of only a fully funded plan (ie they donated the money with the expectation of ZERO returns, that is more risk taking willingness vs investing in the riskiest asset) Willingness - pension fund Ability - foundation, free to solicit from other sponsors, no limit on drawing down capital, and infinite time horizon
Ability - DB has liability which is interest sensitive so ALM-low risk taking ability No surplus- reduce ability DB - penalty for not meeting liability is high and low ability Foundation - long horizon and can accept donation from outside (this was one of the questions in the previous years exam). Ability more. Willingness - foundation as they already invested in high return and high risk assets and trustee mentioned that they were looking for higher return
I had foundation for the ability and pension for willingness, but I really struggled with the willingness one. I would think a foundation founded for perpetuity would have a high willingness, but it seemed like pension was the right answer at the time for willingness. I wouldn’t think that a pension would ever have a higher ability to take risk compared to a foundation, due to the liabilities. I could see why someone would choose pension as an answer for the ability question, but fundamentally, I just don’t agree with that, no matter how well the plan is funded (or how young participants are, etc.). I’m not saying they shouldn’t take risks, but compared to a foundation…not so much.
Again, i thought willingness was easily the foundation. I would be absolutely shocked if I am wrong.
Impermenance Wrote: ------------------------------------------------------- > just think about the consequences of not be able > to make pension payment and not being able to meet > foundation spending. for pension it would be a > disaster. for foundation, what else could happen > other than paying tax. > > so my judgment is, no matter what they say, > pension always has lower risk tolerance than > foundation. Exactly my thinking! NC
Dwight Wrote: ------------------------------------------------------- > Slash Wrote: > -------------------------------------------------- > ----- > > the geometric adds a scale to reduce the > affects > > of increased spending. It was partially a guess > > for me > > > I said it reduced the volatility of spending or > some BS like that. Was basically fishing for > points on that one. I answered the same and I think we are right. I gave the example, that the arithmetic mean of 2, 2, and 3 is 2.33, whereas the geometric mean is less volatile at 2.29. NC
Actually, if you guys look at the 2004 exam you will notice that their is a similar question and you will see why the Pension Fund has the greater ability to take risk. The CFA specifically gives a guideline answer for a Corporte Foundation "Hale lacks the ability to raise funds from other sources, making the foundation more dependent on the returns generated by the investment portfolio. This reduces their ability to Average. Since the vignette specifically highlighted that the Company will stop funding the foundation and was well profitable and would continue to make payments to the pension fund, that would imply the pension fund actually had the greater ability to take risk.
i think the question was refering to ability to take risk and the other was refering to willingness to take risk. In abiliity to take risk, its clear to me that the foundation has more ability to take risk since it doesnt have any explicit liabilities and usually follows a AO allocation approach. The pensoin plan, while it and the company were in pretty good shape, still has explicit liabilities as a good portion of people were already retired and eventhough thier liabilities were nominal they still have to be met, so their A-L allocation approach would require them to have more fixed investments and therefore they have less ability to take risk. The willingness question was tricky and i think i could of gotten it wrong or right. i put that the pension plan had lower willingness to take risk ,since it was in good shape and thier asset allocation consisted of bonds. A good argument can be made for why the foundation has lower willingness, since the foundation is the only one of the two that can a willingness to take risk( especially if its a company sponsored or privately sponsored foundation)…very tricky.
Abilty—pension—sponsor able to make further contributions Willingness—foundation—no specifiac liability seems like it could go either way, hope for partial credit based on reasoning
Abilty—pension—sponsor able to make further contributions Willingness—foundation—no specifiac liability seems like it could go either way, hope for partial credit based on reasoning
Abilty—pension—sponsor able to make further contributions Willingness—foundation—no specifiac liability seems like it could go either way, hope for partial credit based on reasoning
Anyone from Asia in this conversation ?? Dont seem to remember being asked about who had more ability to take risk ??
Agree with you. Also, please note even though it was a corporate foundation, it had the ability to go out and raise more grant. That definitely gave it a higher ability to take risk. Yes, they did not say anything about the pensions funding status.
Perfect! I exactly thought the same way.
Anyone remember what the available points were for this one? I can’t remember
Was it an operating foundation or company-sponsered? If the latter, they can’t go out to the public and raise funds right?