Is it that the Required Return for DB plan is always equal to the actuarial discount rate applied to pension liability ? Anyone can advise ?
This is only true when plan is fully funded. MV of plan assets = PV of PBO and ROR of plan assets = Discount rate of plan liabilities.
This is just one of the return objectives.
actuarial discount rate applied to pension liability is the starting point, normally meaning the minimal value. The actual required return depends on the risk ability and willingness.
For DB plan, is it that “Required Return” is different from the “Desired Return” ? Which one is the Return Objective ? Is it that the Return Objective is the “Desired Return” which depends on the risk ability and willingness ?
AMC Wrote: ------------------------------------------------------- > For DB plan, is it that “Required Return” is > different from the “Desired Return” ? > > Which one is the Return Objective ? Normally, one has only one objective: required, but you can have both. Is it that the > Return Objective is the “Desired Return” which > depends on the risk ability and willingness ? Both depend on the risk ability and willingness.
elcfa, To me, it seems that “Required Return” is certain once it is determined by actuarial discount rate while “Desired Return” is dependent on risk ability and willingness. Therefore, Required Return shall be the Return Objective if pension plan has no risk ability and willingness & Desired Return shall be the Return Objective if the pension plan has risk ability and willingness. Correct me if I am wrong. Thanks !
I am quoting from CFAI pg 373 “The return requirement depends on a number of factors, including the current funded status of the plan and pension contributions in relation to the accrual of pension benefits… For a fully funded pension plan, the portfolio mgr should determine the return req BEGINNING with the discount rate used to calculate PV(plan).” To me, actuarial discount rate is therefore not the ONLY factor, but I agree with you the safest in exam is to say that the required return = discount rate, if plan is fully funded. In addition, the plan can have a higher return objective which is higher than required. Pg 374 shows an example where the total return objective of 7.5% while required return of 6% and GI in question 3 has LT total return objective = 9% > actual return assumption =7%.
elcfa, Thank you so much ! You are much appreciated.