Required return for DBs

[Jones473]

Should we always assume that the actuary’s determination of required return incorporates inflation? E.g. simple example: A DB plan’s liabilities are 200 MUSD and the required return is 5%. Inflation is 3%.

What is the pension plan’s nominal required return? So the answer to this simple question should simply be 5%?

[Flashback]

Is it ALM approach? If so, is there liability discount rate?

[acoxen]

It also depends on if the plan is underfunded, fully funded, or overfunded.

If the plan is fully funded the required return should just equal the discount rate.

• If Assets = PBO the required return is the discount rate.
• If Assets < PBO the required return > discount rate.
• If Assets > PBO the required return < discount rate.

[krokodilizm]

Just opened my notes on this one and found these entries:

Return Objective

• Use actuarial rate.
• If low liquidity and young workforce, follow capital gains focus, otherwise use income focus (duration matching).
• If underfunded seek contributions not aggressive returns.
• Not multiply discount rate by inflation??

For nominal return why is inflation ignored? Isn’t it counterintuitive?

[ashah26]

@krokodilizm

Just opened my notes on this one and found these entries:

Return Objective

• Use actuarial rate.
• If low liquidity and young workforce, follow capital gains focus, otherwise use income focus (duration matching).
• If underfunded seek contributions not aggressive returns.
• Not multiply discount rate by inflation??

For nominal return why is inflation ignored? Isn’t it counterintuitive?

The discount rate already includes inflation (unless they explicitly say it’s a real rate) - look back at the 2012 paper, Q4 or Q5 I think. (I had to learn the hard way…)