Does anyone know why it says that we should consider inflation in Pension Plan return objectives? PBO already includes projected future salary increases, so inflation should already be factored in. Inflation is also considered in Total Future Liability measure (preferred over PBO). Why? Does CFAI want us to assume that pension payments will be indexed to inflation?
From the text “The return requirement is the real return required on the plan assets plus the expected inflation rate”
I would say as employees get older in the company , presumably they are more productive and paid higher. Salary increase is not an inflation thing. Future salary increases will come even with inflation rate low
Salary increase/decrease is positively related to the inflation. My two cents!
Schwezer says that Total Future Liability is PBO adjusted for inflation. Salary increases are already included in PBO though. So, isn’t it double counting to adjust PBO for inflation? Again, the only way this makes sense to me would be if pension payments (not salaries) were indexed to inflation. Am I missing something?
ALWAYS achieve returns that adequately fund its pension liabilities i.e meet or exceed specified actuarial assumptions embedded in PV calculations If the plan is fully funded - then the exact amount would be what the PBO specifies - so it is enough to meet the rate used to calculate the PBO (which includes inflation). so real rate + inflation would cover that – at least that much must be earned on the pension assets to make sure that the fund does not fall into a underfunded status.