Closed DB means lower risk tolerance?

O

olivia_x

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
I went through a past question and it is asking the risk tolerance change when the pension plan closed to new participants.
I was wrong because i was thinking that since the pension is closed to new employees, then the remaining liabilities are more predictable and easy to manage so should mean a higher risk tolerance.
The CFAI answer is – lower - because the higher ration of inactive to active ration of emplyees and then lower liability duration. Ok i could accept this explanation.
But how about my explaination? Isn’t it true that more new employees would necessarily mean more liabilities to a firm? I can’t think of a company in real life wouldn’t like the idea not need to cover pensino for their emplyees
Please, guys, any thoughts?
 
Was there any additional facts such as the funded status of the penion? Was it Asset Only managed or Asset-Liability Managed. I think there are more case facts taht would explain why it would be lower.
 
mbjones21 wrote:
Was there any additional facts such as the funded status of the penion? Was it Asset Only managed or Asset-Liability Managed. I think there are more case facts taht would explain why it would be lower.
Click to expand...
hmm the explaination didn’t mention the fund status or the way it is managed but only talking from a liability duration decreasing point of view which I agree. But i am wondering whether/why my explaination is incorrect
 
Yes I think you are overthinking the scheme status here (or at least just thinking too much about real life). The fact it’s closed doesn’t necessarily mean that it’s so easy to manage (from CFA standpoint, not talking real life here). In the CFA world risk is derived from time horizon & age structure primarily. This Saturday the fact that the scheme is closed to new participants should only mean to us that there are more and more pensioners than active members and the scheme is mature and hence it’s got a shorter time horizon etc. :)
 
The fact that it is closed alone is already a bad sign. Also a closed plan means less ongoing contributions from plan participants, so increased liquidity need while duration of liabilities is shortening as there are more inactive
 
for a closed plan you would need the money sooner than with an open plan.
 
MissYiota wrote:
The fact that it is closed alone is already a bad sign. Also a closed plan means less ongoing contributions from plan participants, so increased liquidity need while duration of liabilities is shortening as there are more inactive
Click to expand...
Thanks guys! now I am quite clear.
Guess it’s easier to always think from pension liability/liquidity point of view.
A quick question for MissYiota please - here you mentioned less ongoing contributions from plan participants. I thought in DB only plan sponsor/company itself would contribute to the plan? Correct me if I am wrong please.
 
I would go with the the lower time horizon for participants lead to lower risk. Ha yep for pension always mention duration. Lower time lower duration as justification.
 
I would go with the the lower time horizon for participants lead to lower risk. Ha yep for pension always mention duration. Lower time lower duration as justification.
 
You must log in or register to reply here.
Back
Top