Basically it asks : Determine whether Foundation or DB Plan has greater ability to take risk. Justify with one reason.
Official Answer : Foundation has greater ability. Foundation has spending goal that is supported by an objective of minimizing taxes. In contrast, pension plan must pay defined benefits, which constitutes legal liability.
My Answer to the justification part : If assets decrease in value due to unfavorable market movements, Foundation’s spending will decrease in line with the decrease in assets. On the other hand, the DB Plan spending must remain fixed even if assets value decrease, causing a lower ability to take risk.
How did the Official Answer come up with the “perpetuity” part? Should we always assume perpetuity if the case scenario doesnt mention a predefined time horizon?
Personally, no. It’s important to note that it’s a contractual liability IMO. A foundation doesn’t spend = get hit with a tax bill. Pension doesn’t meet payments, all sorts of legal issues. That’s a huge deal in it’s ability to take risk. You just reference a math truth = payments fixed vs not, really not the explanation on WHY.
It’s kind of like those ability to take risk on a individual. Like David needs 5K a year for his life, he also wants to give 1 trillion dollars to my little pony foundation. He NEEDS to meet 5K, he COULD drop his donation. IMO it’s important to explain the WHY.
Yes. Unless it says operating for a fixed time. I would also think that they could get tricky and say it’s not concerned with purchase power, which IMO would be a flag that it is NOT operating in perpetuity.