IPS Time Horizons for DB Pensions

CFA Level III Portfolio Management
#1

Hi all,

Time Horizons for DB Pension Plans seems to be a bit of a subjective area.

Factors influencing if it is a long or short time horizon is company going concern, workforce age, and active to retired ratio. Also, it seems like DB plans either have Long Term or Short Term time horizons, there is no Moderate Term.

The CFAI text seems to suggest that a workforce average age of ~50 years seems to lean towards a short time horizon. All of this seems counter intuitive as the plan would seem to need to pay benefits for 25+ years, which would be long term to me logically.

So setting all things logical aside, what are some of these number or ratios that would tip off the reader to designate the Time Horizon as Long Term or Short Term?

Thanks.

#2

  1. Average age of active participants. If they are mostly close to retirement and a Plan is not funded, time horizon may be an issue.

  2. Mandatory or Company’s policy prescribed retirement age. Same as above.

  3. Lump sum issues. I mean if there is any lump sum in the near future and a Plan is not fully funded.

  4. There may be some cases, when fund is closed for new participants and its elimination is announced.

#3

Can you break each of those down to if that makes it Long Term or Short Term?

#4

All of above shorten Time Horizon. If none of above is an issue than Plan’s status have opposite characteristics, it’s imply long time horizon . Eg. fully funded or over funded, young active participants with some or none already retired, Sponsor’s strength is high, no lump sum provisions and similar limits.

If there are mixed circumstances, or as is common in next question, 10 years after everything’s gone wrong, than you may be asked to compare which circumstance is referred to decrease of TH or what else. That’s my experience with such questions.:slight_smile:

#5

The time horizon for a 50 year old being short implies when the money would be needed, ie in 12-15 yrs. Which is short compared to say a 25 year old avg age they wouldn’t need it for 30-35 years

Yes, in both cases the amount of time they need to pay the benefits is long, but that is not what they are looking for.