Pension required rate

[MissYiota]

I understand if the plan is fully funded, (surplus=0), use the discounted rate used for the PV of liabilities
But what if the plan is over/under funded? What to use?

 

[S666]

MissYiota wrote:
I understand if the plan is fully funded, (surplus=0), use the discounted rate used for the PV of liabilities

I don’t think this is true 100% of the time. I have seen questions that describe a “mnimum actuarial rate” along with an inflation rate and managment fees. In this instance, given that information, and not a discount rate, I would use those three data points in a multiplicative format:
(1+ min actuarial rate) x (1 + inflation rate) + (1 + management fee %) - 1 = required return.

 

[MissYiota]

Thank you. But my question is, in the case we have a discounted rate used for the liablities PV, and then they ask the minimum requirement for an over/under funded plan. What to do?

 

[Mosstastic]

If you’re underfunded, take the FV of the PBO in n number of years (when you want to be fully funded by) using the discount rate.
So, PBO is 10,000, discount rate is 6, number of years is 5. Calculate FV PBO.
Then go ahead and calculate the FV of your plan assets. Lets say you have 8000.
8000(1+r)^5 = FV PBO
Solve for r. That would be your minimum required return.

 

[cokemicho]

S666 wrote:

MissYiota wrote:
I understand if the plan is fully funded, (surplus=0), use the discounted rate used for the PV of liabilities

I don’t think this is true 100% of the time. I have seen questions that describe a “mnimum actuarial rate” along with an inflation rate and managment fees. In this instance, given that information, and not a discount rate, I would use those three data points in a multiplicative format:
(1+ min actuarial rate) x (1 + inflation rate) + (1 + management fee %) - 1 = required return.

intuitively it is correct but….
As I understand this isnt necessirily true, the actuarial rate accounts for inflation and operational costs ( this is shown in many exercises & mocks) so the return must be at least the actuarial rate (not the sum of the 3 factors you mentioned),
In my personal expirience doing mocks if you answer this the way you wrote it you got the answer wrong.

 

[cokemicho]

Mosstastic wrote:
If you’re underfunded, take the FV of the PBO in n number of years (when you want to be fully funded by) using the discount rate.
So, PBO is 10,000, discount rate is 6, number of years is 5. Calculate FV PBO.
Then go ahead and calculate the FV of your plan assets. Lets say you have 8000.
8000(1+r)^5 = FV PBO
Solve for r. That would be your minimum required return.

+1 also i havent seen this kind of questions