Healthcare costs - Pension blue box

CFA Level II
#1

Hi,

on page 194 of CFA curriculum there is a blue box that asks who has the less conservative healthcare costs.

CNH shows initial trend at 9% then ultimate trend 5%

Caterpillar shows initial trend 7% and ultimate trend 5%

The answer says Caterpillar appears LESS conservative as its heathcare cost increase of 7% is significantly lower than CNH.

Because it is lower does this not mean that Caterpillar has in fact MORE conservative assumptions?

A bit confused.

thanks

#2

Assuming that health care costs will grow at a faster rate (9% in this case) is more conservative, as you will need to account for greater anticipated costs. So yes, the answer is correct in that Caterpillar’s assumption is less conservative in this case.