Hang on a second… You mean to tell me that because a firm may currently not be profitable they shouldnt’ be considered a “going concern”. Tell that to all the shareholders, board of directors, management team, and the markets where the stock is listed on. Again, the pension plan being significantly underfunded has no relevance whatosever to time horizon. It does, however, have a tremendous impact on the firm’s ability to take risk with its pension assets. We are going to have to agree to disagree.
I’m not talking about 1 period, I’m talking over multiple periods. PJ if a pension fund is severely underfunded and the firm isn’t profitable, it may have to make a huge contribution to the fund to make it Whole or Funded which can put the company in Jeopardy. If you want to take my advice or not is yoru decision. But if on the exam it says that the firm hasn’t been profitable, its underfunded, teh Average age of the workers is high, etc, I’m going to say that it should have a Long Time horizon BUT due to the following circumstances the Plan has a Shorter time horizon…or something along those lines.
As I stated above, maybe it should have been stated SHORTER and not SHORT unless the Pension Plan is closed to new entrants. Agreed??
I can agree, unwillingly, to that statement The reason I would agree is that since most of the pension liabilities will currently come due over the next 10-15 years, the time horizon would be shorter than if the pension liabilities were further out as would be the case with a younger age force. Having said that, I certainly would not be stating on the exam that the time horizon was SHORT or around 7 years in length unless it was in fact closed off to new entrants.
I guess you could say, It has a long time horizon but it is shorter than a typical pension plan b/c of X, Y and Z.
Yes… You could state in your answer to the sample you mentioned above: “The pension plan has a shorter time horizon due to the restriction on new entrants into the plan and the large % of pension liabilities coming due over the next 10-15 years”
WE AGREE YAY!
LOL… I feel like I got swayed into this hahaha… it was a good compromise solution though.
my turn to pipe in - you all just agreed to an answer the CFAI hates - you just hedged your bets by saying its a long term BUT since this occurs its short term. Careful.
I see what you’re saying about hedging our bets… I would just state on the exam that the time horizon is shorter due to xyz.
PJ - you and bigW said: “I guess you could say, It has a long time horizon but it is shorter than a typical pension plan b/c of X, Y and Z” & "“The pension plan has a shorter time horizon due to the restriction on new entrants into the plan and the large % of pension liabilities coming due over the next 10-15 years” I’m saying that the first sentence is ‘hedging’ and the CFAI frowns on that and the second sentence can be viewed similar (shorter but 10-15 year horizon) although its not as obvious as the first sentence.
Here’s the best example I can find regarding time horizon: “on average the plan participants are 39 years old and the duration of plan liabilities is 20 years. The 'time to maturity” of the corporate workforce is a key strategic element for any DB plan. Having a younger workforce often means that the plan has a longer investment horizon and more time available for wealth compounding to occur. These factors justify ASEC adopting a relatively long time horizon for as long as ASEC remains a viable going concern" The oposite of that would be a short (or to appease PJ shorter) time horizon for a workforce who’s time to maturity is approximately 7.5 years.
Interesting point… I choose to revise my answer as follows, “Given the restriction on new entrants into the plan, the average age of the work force and the intermediate nature of the pension liabilities, the firm’s pensioin plan time horizon is short-to-intermediate in length”
So this is what happened while I was working today… PJ, everything you said (up to the point where you started compromising) is true. My advice is go with it on the exam. Striker, You’re not hedging by saying “still long, but shorter than the other case”. You’re just describing more fully. hala, your logic will get you in trouble. 99% of pension plans (at least in the US and Canada) pay monthly benefits. You can’t imagine something that isn’t given in the question (and generally isn’t true in real life) and then generalize based on that.
I still stuck with what I thought until I read that part of the case said, “No more entrants were allowed into the pension plan” That significantly shortens the time horizon.
But still doesn’t make it “short”. Even a 65 year old retiree has a duration of around 10 to 12 years and a time horizon of around 20 (that’s life expectancy at age 65). Show me where CFAI says 20 years is short.
Wow! I have never witnessed such a heated and passionate discussion about pension fund management. FWIW, here is my interpretation of “short term” and “long term” for ALM: Liquidity constraints are a big factor that determine your time horizon. You have a long time horizon if you can invest in illiquid assets like private equity and real estate. If you have to pay benefits for the majority of your workforce in less than 7 years, those assets probably have no place in your portfolio. Yes you need to have some assets with a longer maturity to match the duration of your retirees, but those still need to be liquid assets with a yield component, like govies. So, I have to go with “short” on this… Sorry but I don’t think there’s a grey area like “relatively short for a pension plan”; that just seems un-CFA like
People of the World, This question had me confused and mind you I do A/L studies for pension plans for a living. My earnest answer is that overall the pension horizon is long term because the plan is ongoing. Moreover there is still a substantial portion of actives accruing benefits. Normally when we do cash flow projections for such a plan, they go easily upto 60/70 years. Since the average age is high, most of the liability is attributable to a group with high age and high service. There is a ‘bullet liability’ about 8 years from now. In practice I would divide the liability into pieces like inactive, accrued, future etc. In this case the accrued and inactive liability have short time horizons and future liabilities have a long time horizon. However, we are working to pass the exam and the right answer in practice is not always the right answer on the exam.