If a DB plan is now underfunded, what is its return objective? A. same as the actuarial discount rate B. above the actuarial discount rate C. others - sticky
Great question! I would think that the rate should be the same as the actuarial discount with the hopes that the company will be able to make additional contributions down the road to overcome the shortfall. PJStyles
at a minimum of the discount rate on the liabilities, but if at all possible (by not taking to much risk) it should be over the discount rate on the liabilities to try and make up the shortfall. One of the CFAI exam had something like this and that is what the had.
s23dino Wrote: ------------------------------------------------------- > One of the CFAI exam had something like > this and that is what the had. which page? - sticky
PJStyles Wrote: ------------------------------------------------------- > Great question! I would think that the rate > should be the same as the actuarial discount with > the hopes that the company will be able to make > additional contributions down the road to overcome > the shortfall. Actually this question is inspired by Q5, exam 2006. In that question, ACLP was funded, so, according to answer, “the minimum required rate of the plan is the discount rate used to calculate PBO”. That’s why my question — what if ACLP becomes underfunded? Back your feedback. I also think the same way as you, because I think that the return requirement should not change simply because of underperformance/underfunding. More comments on this welcome though. - sticky
i believe REQUIRED return still has to be discount rate, but DB plan managers might have a statement like (bla bla bla return objective + 200bps bla bla bla).
i would go with the actuarial rate if the plan is underfunded based on the fact hte main goal of a pension plan is to meet its liabilities. The sponsor’s responsible for funding shortfalls, not the plan therefore, the sponsor will make incrased contributions to bring the plan to fully funded status, where as the plan itself should earn the atuarial rate. this ties into the idea that an underfunded plan will tend to have a below average risk tolerance. in a fully funded or overfunded then the plan’s return goal can be higher than the actuarial rate since it has an increased ability to accept risk.
^100%. That is the problem with a underfunded DB plan. Don’t get tempted to achieve a higer rate of return…given its underfunded status, the ability to take risk is lower. So shooting for discount rate would be appropriate choice.
Your ability to assume risk is lower if it’s underfunded, as you can’t assume any more of an exacerbation in the underfunded status… if you are overfunded it’s a different story, you, you can take on more risk as you have a surplus that can absorb any additional volatility. Remember Required Return = What you Need to get not what you WANT to get.
sticky Wrote: ------------------------------------------------------- > PJStyles Wrote: > Actually this question is inspired by Q5, exam > 2006. In that question, ACLP was funded, so, > according to answer, “the minimum required rate of > the plan is the discount rate used to calculate > PBO”. That’s why my question — what if ACLP > becomes underfunded? So, are we in consensus that in the above case from exam 2006, the minimum required rate of the plan should be the same PBO discount rate, whatever funded status of the plan? - sticky
I do agree with this it does make sense but I think it was the 2001 exam they had you pick a an asset allocation for an underfunded plan that had a goals of a required return of like 8.4 % and standard deviation of 16. There were two choices one had like a return of 9.1 and standard deviation of 16.1 and another had a return of like 8.2 and standard deviation of 12.8 and cfai picked the higher return/standard deviation one. And they did state they choose the 9.1 that will help the underfunded status somewhat so you need to be careful with this depending on the case. I picked the other one thinking you could not take additional risk and the fund sponsor would need to contribute funds. I imagine if the goal was 8.4 either that was the discount rate on the liabilities or it was lower. -Thanks.