Pension - younger workforce - interest rate risk

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FrankCFA

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Is below statement correct? Thanks.
The younger the workforce and the greater the proportion of active lives, the greater the duration of plan liabilities so more sensitive to interest rate risk.
 
No. The greater proportion of active participants of the fund should have a lesser duration due to the fact that their currently being serviced by the pension and the investment horizon is closer than the young workforce. I have a feeling this is a statement you just made up and it would never show up on the exam.
 
JSobes wrote:
No. The greater proportion of active participants of the fund should have a lesser duration due to the fact that their currently being serviced by the pension and the investment horizon is closer than the young workforce. I have a feeling this is a statement you just made up and it would never show up on the exam.
Click to expand...
Active lives are matched with LT bonds and equities/tips. Therefore the duration would be greater than retired lives who have shorter term bonds.
 
whatsyourgovt wrote:
JSobes wrote:
No. The greater proportion of active participants of the fund should have a lesser duration due to the fact that their currently being serviced by the pension and the investment horizon is closer than the young workforce. I have a feeling this is a statement you just made up and it would never show up on the exam.
Click to expand...
Active lives are matched with LT bonds and equities/tips. Therefore the duration would be greater than retired lives who have shorter term bonds.
Click to expand...
I suppose this is my mistake. When I read this I read “active lives” as “active participants.”
 
I really wish they had choosen a naming convetion that actually made sense. Something like:
Retired
Working
 
Amen. Welcome to finance - where the words are made up and the traditional meanings don’t matter!
 
Engineering is difficult. Engineers use intuitive definitions to gain acceptance by the public of their products and services. “Your engine needs plugs replacement, and your injector needs cleaning ” , ” the control surfaces of the airplane control the attitude of the airplane”
IT experts, use lame terminologies in order to confuse you so you don’t know what they’re doing “you have a problem? Are you sure your device is turned on? Then the problem must be that the IP address in your router doesn’t match the MAC in your switch and the filters in your firewall; we’ll have a look at the gateways as well”
HR talk rhetoric to justify not giving you a bonus or firing you ” our structure is going flat in order to increase efficiency and reduce cost. You’ll be demoted “; the following year “the cost of restructuring is high, we have to terminate your services “.
Finance guys confuse the public for them not to know what happened to their investments “the subprime mortgages caused your AAA rated bond investments to be downgraded to junk. The insurance of those investments went bust because of , say it with me, the subprime mortgages “
Politicians “we’re entering a 1 trillion dollars war against Iraq for the reason that …(fill up any reason of your choice in here)”
 
The younger the workforce (increases risk tolerance hence more risk hence more liabilities?) and the greater the proportion of active lives (more liabilities, size of liabilities drives up the duration of plan liabilities so more sensitive to interest rate risk).
So in both cases duration of plan assets is higher.
 
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