Pension plan min return requirements

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Gmax

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If pension plan surpluss is 0, then min return requirement is discount rate of the liabilities. What is a pension plan min return requirement if it’s in surpluss or deficit?
 
Surplus or deficit doesn’t affect return requirement at all….it affects risk tolerance.
 
S666 wrote:
Surplus or deficit doesn’t affect return requirement at all….it affects risk tolerance.
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So it means that the discount rate of liabilities is always a min return requirement for the plan’s assets ?
 
Gmax wrote:
S666 wrote:
Surplus or deficit doesn’t affect return requirement at all….it affects risk tolerance.
Click to expand...
So it means that the discount rate of liabilities is always a min return requirement for the plan’s assets ?
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that or the immunization rate. depending on your funded status
 
AlmostDoneIII wrote:
Gmax wrote:
S666 wrote:
Surplus or deficit doesn’t affect return requirement at all….it affects risk tolerance.
Click to expand...
So it means that the discount rate of liabilities is always a min return requirement for the plan’s assets ?
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that or the immunization rate. depending on your funded status
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What’s the difference between immunization rate and liability discount rate?
 
I’ve seen some CFAI answers state the required return is the nominal discount rate used to calculate the PV of liabilities - and sometimes I have seen it stated as the multiplicative method using a “minimum actuarial rate”, the inflation rate and the management fees.
So I think if we are given the discount rate, use the dicount rate as the return requirement - if we are instead given a minimum actuarial return, use that with the multiplicative method as described above.
At least that’s how I reconcile seeing the two different return requirements over different exams…
 
Makes sense. But I was wondering if the immunization rate is different from the discount rate. I thought they were the same.
 
MrSmart wrote:
Makes sense. But I was wondering if the immunization rate is different from the discount rate. I thought they were the same.
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Yeah i would also think they are the same, as the immunisation rate is the rate that locks in the same rate of return at which the liabilities are being dscounted at. Makes sense to me.
 
There are instances where the discount rate the immunization rate will differ. When they do, that’s when we deploy a contingent immunization strategy.
We can fully immunize the portfolio at 4%, but the discount rate may indeed be lower than this at 3%. This is the difference AlmostDoneIII is referring to.
However, I’d never imagine that the immunization rate, if higher, would be the minimum return requirement. It’s more likely in the above case that the immunization rate would instead be the desired return, and the discount rate is still the critical return requirement.
 
Mosstastic wrote:
There are instances where the discount rate the immunization rate will differ. When they do, that’s when we deploy a contingent immunization strategy.
We can fully immunize the portfolio at 4%, but the discount rate may indeed be lower than this at 3%. This is the difference AlmostDoneIII is referring to.
However, I’d never imagine that the immunization rate, if higher, would be the minimum return requirement. It’s more likely in the above case that the immunization rate would instead be the desired return, and the discount rate is still the critical return requirement.
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That doesn’t make sense still. Immunization rate is not the desired rate, it’s the rate at which you will completely immunize your portfolio, which is also the discount rate of the liabilities. You cannot have one over the other, at least to my understanding from the book.
 
I think Mr Smart and I are calling the immunisation rate the actual rate you lock in as soon as your dollar safety margin drops to zero, whereas moss and almostdone are calling the immunisation rate the higher rate available on the portfolio which you use to calculate your dollar safety margin in the first place. That’s where the disagreement lies….other than that, I think we would be in agreement.
 
S666 wrote:
I think Mr Smart and I are calling the immunisation rate the actual rate you lock in as soon as your dollar safety margin drops to zero, whereas moss and almostdone are calling the immunisation rate the higher rate available on the portfolio which you use to calculate your dollar safety margin in the first place. That’s where the disagreement lies….other than that, I think we would be in agreement.
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Ding Ding Ding Winner Winner chicken dinner
 
AlmostDoneIII wrote:
S666 wrote:
I think Mr Smart and I are calling the immunisation rate the actual rate you lock in as soon as your dollar safety margin drops to zero, whereas moss and almostdone are calling the immunisation rate the higher rate available on the portfolio which you use to calculate your dollar safety margin in the first place. That’s where the disagreement lies….other than that, I think we would be in agreement.
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Ding Ding Ding Winner Winner chicken dinner
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I hope you realize that it’s not correct.
 
MrSmart wrote:
AlmostDoneIII wrote:
S666 wrote:
I think Mr Smart and I are calling the immunisation rate the actual rate you lock in as soon as your dollar safety margin drops to zero, whereas moss and almostdone are calling the immunisation rate the higher rate available on the portfolio which you use to calculate your dollar safety margin in the first place. That’s where the disagreement lies….other than that, I think we would be in agreement.
Click to expand...
Ding Ding Ding Winner Winner chicken dinner
Click to expand...
I hope you realize that it’s not correct.
Click to expand...
I think you’re reading way into the terminolgy and missing the point. But anyways you can stick to what you are doing and i’ll stick to what i’m doing cause I haven’t missed any of these related questions.
 
I get the point, I’m just pointing out the terminology mishaps. The target immunization rate adjusts the minimum target value required, this is different from market immunization rate, we generally are referring to the latter. Which is also the discount rate.
 
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