Reading 24, page 105 Question #14
Dianna Mark is the chief financial officer of Antiliaro, a relatively mature textile
production company headquartered in Italy. All of its revenues come from
Europe, but the company is losing sales to its Asian competitors. Earnings have
been steady but not growing, and the balance sheet has taken on more debt in
the past few years in order to maintain liquidity. Mark reviews the following
facts concerning the company’s defined benefit (DB) pension plan:
● The DB plan currently has €1 billion in assets and is underfunded by
€100 million in relation to the projected benefit obligation (PBO) because of
investment losses.
● The company to date has made regular contributions.
● The average employee age is 50 years, and the company has many retirees
owing to its longevity.
● The duration of the plan’s liabilities (which are all Europe based) is 10 years.
● The discount rate applied to these liabilities is 6%.
● There is a high correlation between the operating results of Antiliaro and
pension asset returns.
Determine whether the risk tolerance of the DB plan is below average or above
average. Justify your response with two reasons.
So the CFA answer to this question mentions multiple times that “the discount rate being used is fairly aggressive”
My question is: based on the info in the question, how can one make this assertion? There is no indication that I can see that 6% is an aggressive rate, because there is no known info on the level of rates. For all we know Treasuries could be 10%.
Am I missing something?
