If a DB plan reduces the retirement age requirement for full benefit from 60 to 50, how does it affect the life/time horizon of the DB plan?
shorter because they will need to pay the benefits sooner.
IMO: Given every thing else is constant, DB plan still have extremely long term time horizon
I think everything else constant, time horizon shorter by 10 years and lower risk tolerance.
Unless its closed to new participants, it actually doesn’t matter regarding the time horizon. The TH is long-term no matter what and essentially indefinite.
tomsimons Wrote: ------------------------------------------------------- > Unless its closed to new participants, it actually > doesn’t matter regarding the time horizon. The TH > is long-term no matter what and essentially > indefinite. I agree with this… however, let’s assume that they make this change. Wouldn’t this increase the population of benefit recipients considerably(i.e., a larger pension liability)? So wouldn’t the fund be depleting its assets faster? If this is the case, how does the fund cope during the transition period? Does that make sense?
It affects the liquidity needs (all of sudden you have more people who need to be paid retirement benefits). On the duration I think it will shorten the duration since more people will start getting paid a benefit sooner (assuming same level of longevity risk eg. at 60 retirmemnt you plan for 20 years of benefits, at 50 years you would assume 30 years of benefit). Caveat to the above- assumption is the benefit is the same at retirement at 50 than it is at 60…In reality benefits paid out are not the same.
CF_AHHHHHHHHH Wrote: ------------------------------------------------------- > tomsimons Wrote: > -------------------------------------------------- > ----- > > Unless its closed to new participants, it > actually > > doesn’t matter regarding the time horizon. The > TH > > is long-term no matter what and essentially > > indefinite. > > > I agree with this… however, let’s assume that > they make this change. Wouldn’t this increase the > population of benefit recipients > considerably(i.e., a larger pension liability)? So > wouldn’t the fund be depleting its assets faster? > If this is the case, how does the fund cope during > the transition period? > > Does that make sense? I agree that that makes sense, but I think the issue here is what exactly the question is asking. If it asks only for the TH constraints in the IPS, then there’s no change. It was already an indefinite length and infinity plus 1 is still infinity, right? It certainly does increase the liquidity demands for the pension fund and from an accounting perspective it wildly changes the PBO, etc. The change significantly affects the return requirement (will need to refund depleting assets much more aggressively) the risk (less able to take risk), and the asset allocation (will need to adjust duration for liability matching or some similar adjustment depending on strategy). From my read, this question is much easier than it seems.
tomsimons Wrote: ------------------------------------------------------- > CF_AHHHHHHHHH Wrote: > -------------------------------------------------- > ----- > > tomsimons Wrote: > > > -------------------------------------------------- > > > ----- > > > Unless its closed to new participants, it > > actually > > > doesn’t matter regarding the time horizon. > The > > TH > > > is long-term no matter what and essentially > > > indefinite. > > > > > > I agree with this… however, let’s assume that > > they make this change. Wouldn’t this increase > the > > population of benefit recipients > > considerably(i.e., a larger pension liability)? > So > > wouldn’t the fund be depleting its assets > faster? > > If this is the case, how does the fund cope > during > > the transition period? > > > > Does that make sense? > > I agree that that makes sense, but I think the > issue here is what exactly the question is asking. > If it asks only for the TH constraints in the > IPS, then there’s no change. It was already an > indefinite length and infinity plus 1 is still > infinity, right? > > It certainly does increase the liquidity demands > for the pension fund and from an accounting > perspective it wildly changes the PBO, etc. > > The change significantly affects the return > requirement (will need to refund depleting assets > much more aggressively) the risk (less able to > take risk), and the asset allocation (will need to > adjust duration for liability matching or some > similar adjustment depending on strategy). > > From my read, this question is much easier than it > seems. Even the plan is going to go on till perpetuity (due to a firm being a going concern), you still have to consider current retirees. If the plan decreases the retirement age, the liquidity needs go up and time horizon is shortened.
drymartini Wrote: > > If the plan decreases the retirement age, the > liquidity needs go up and time horizon is > shortened. Agree with drymartini. Time horizon has changed and shortened. Mgr. would have to adjust the duration of portfolio to match shorter liability duration on the basis of ALM strategy.