Should the IPS always state a specific return requirement??

[patso]

Should the IPS always state a specific return requirement?? For example the IPS on page 226 Vol 2, says “The LSC Pension Plan’s return objective should focus on real total returns that will fund its long-term obligations on an inflation-adjusted basis.”. And you are required to critique it. I thought this IPS return objective is perfect however CFAI says it has a weakness of not stating a specific return requirement. How would one state a specific return requirement since the projected benefit obligations change every reporting date.

 

[S2000magician]

It appears that you’re not looking at the 2015 curriculum.
In the example in the 2015 curriculum for a pension plan – Vol 2, p. 442, ASEC – their example return objective includes a specific number (7.5%).
If CFA Institute says that you need the number, you need the number.

 

[Galli]

I think it’s confusing how the text does go back and forth between a return ‘objective’ and a required return.
I’ve done a few practice problems where the client’s objective was aggressive growth but the actual return objective in the ISP stated they were skeeing aggressive growth but the text also provided the required return in order satisfy liabilities and other monetary needs the Client has.
Should list both, what the client “wants” and what the client actually “needs”. Often they are different.

 

[ink]

I think you should use a bit of common sense when thinking about the return requirement for this question.
If you were a pension fund manager, would you really create an IPS with a return requirement that does not specify what exactly it is or how it is measured and that instead relies only on generalities? An IPS like that, as the curriculum says, is “weak” (though not wrong).
And if you’re worried that the return requirement might change, you can always say something along the line “the return requirement needs to be revised on regular intervals to account for changes in capital market expectations, pension fund obligations, unique circumstances (if any), etc.”

 

[patso]

Thanks Ink

 

[Viceroy]

ink wrote:
I think you should use a bit of common sense when thinking about the return requirement for this question.
If you were a pension fund manager, would you really create an IPS with a return requirement that does not specify what exactly it is or how it is measured and that instead relies only on generalities? An IPS like that, as the curriculum says, is “weak” (though not wrong).
And if you’re worried that the return requirement might change, you can always say something along the line “the return requirement needs to be revised on regular intervals to account for changes in capital market expectations, pension fund obligations, unique circumstances (if any), etc.”

There are corrected EOCs without specific return requirements…
I am asking myself the same question and no, it doesn’t have much to do with common sense.

 

[cpk123]

Quote:
“the return requirement needs to be revised on regular intervals to account for changes in capital market expectations, pension fund obligations, unique circumstances (if any), etc.”

Aren’t those the very same points for which the IPS is revisited during your discussion to review the IPS every so often? So is there a need to state something that is obvious? If you did not do what is being said above - you are not doing your job as a Portfolio / Investment manager.

 

[patso]

Hi Viceroy. Where are the corrected EOCs…im using online books and they still show the above????

 

[Viceroy]

I am just talking about the solutions of the EOCs ; sorry for not being very clear.
Examples:
- Volume 2, p.215, Question 9-A : the Return objectives do not state Return Requirements
- Volume 2, p.217, Question 10-A : the Return objectives do state the Return Requirements
- Volume 2, p.218, Question 11-A : the Return objectives do not state the Return Requirements
- Volume 2, p.220, Question 12-A : the Return objectives do not state the Return Requirements
- Volume 2, p.223, Question 13-A-ii : the Return objectives do state the Return Requirements
–> TXS CFAI for being so consistent in WTF it is you expect us to write.

 

[ink]

Viceroy]</p> <p>[quote wrote:
There are corrected EOCs without specific return requirements…
I am asking myself the same question and no, it doesn’t have much to do with common sense.

Look again. The examples you brought up are from managing individual protofolios, where one has more leeway in terms of specifing return objectives that are qualitative or/and quantitative in nature. Do you really think you’ll be fullfiling your responsabiliities for a pension fund if you state something along the lines “Engouh to fund people’s retirement on a total return basis.” This answer isn’t wrong, but it’s not complete.

cpk123 wrote:

Quote:
“the return requirement needs to be revised on regular intervals to account for changes in capital market expectations, pension fund obligations, unique circumstances (if any), etc.”

Aren’t those the very same points for which the IPS is revisited during your discussion to review the IPS every so often? So is there a need to state something that is obvious? If you did not do what is being said above - you are not doing your job as a Portfolio / Investment manager.

If you read exmaple 7, you’ll note that the CFAI state a review schedule for their pension IPS. Obviously, the review will be applied to all aspects of the IPS, and not only the return objective.

 

[Viceroy]

^^^^
I do not understand your rationale for stating that the quantitative return requirement is more relevant for a pension fund than for an individual.
Also if possible please post source from the CFAI Text.
Txs.

 

[ink]

“A DB pension plan’s broad return objective is to achieve returns that adequately fund its pension liabilities on an inflation-adjusted basis. In setting return objectives, the pension sponsor may also specify numerical return objectives.”
See more in section 2.1.2, Reading 14, about how a numerical objective can be specified.
As I mentioned before, the answer “focus on total return” for DB plan is not wrong, but drafing the IPS with a broad return objective is not good enough. CFA states this clearly in the case of Question 2 from EOC: “The IPS is weak in that it neglects to state a specific return requirement.”
For individual investors, the return objective stated by the client can have qualitative descriptions, “Need enough for retirement to live at about the same salary I have today”, which at some point will have to be translated into a numerical estimate through cash flow analysis or monte-carlo.
I hope this answers your concern.