Return obj - pension IPS

Assuming you’re given the discount rate applied to liabilities in a pension plan, will that always be the minimum required return?


Thanks. I’m also getting confused with time horizon for pension funds – let’s say duration of plan liabilities is less than 10y and avg age of workforce is 50, how would that go? How much does the duration of plan liabilities weigh-in versus workforce/plan characteristics? As long as the plan is a going-concern you have to consider the long-run… not sure how to simply group everything into only 1 bucket…or is it not necessary to choose just one?

In response to pups answer: I haven’t gone over these in a while but planning to do so soon, but if management voices a desire to earn something higher than the discount rate, don’t we have to go along with that as long as it doesn’t conflict with the beneficiaries constraints?

but minimum required rate would still be discount rate.

av age of workforce is 50years old then this is an old workforce and time horizon will be shorter than if it were a young workforce. you also need to look at the ratio of retired lives to active lives.

The age of the workforce and the mix of active versus retired employees affects the duration of the liability and the liquidity requirements. If you have a company where the average worker is 35 years (30 years from retirement), duration of liability is long along with time horizon being long. If you have a company where average worker is 45 years (15 years to retirement) duration of liability is still long, but you have have a shorter time horizon. If you have a company where average worker is 45 year (15 years to retiremen) and you have active retirees, duration of liability is long, but you have liquidity needs (need to pay existing retirees), you have time horizon that is both short term and long term in nature.