How would one solve this question:
What is the required rate fo return for a DB pension plan assuming a discount rate to value liabilities of 5 percent, inlfation of 2 percent and 0.3 percent investment management costs?
DB plan normally doesnt state to keep the real value of the portfolio, the assets arent meant to live indefineitely. Unless, explicitly stated, but I dont think Ive ever seen a DB plan where they wanted to maintain the real value of the assets like an endownment or foundation.
5.3 for DB plan
If it were an endownment it’d be 7.3
Systematic wrote:
DB plan normally doesnt state to keep the real value of the portfolio, the assets arent meant to live indefineitely. Unless, explicitly stated, but I dont think Ive ever seen a DB plan where they wanted to maintain the real value of the assets like an endownment or foundation.
5.3 for DB plan
If it were an endownment it’d be 7.3
if benefits are indexed to inflation, then the returnw ould need to include the rate of inflation.
Does anyone remember if the discount rate was nominal or real, becasue if it was real, then we need to incorporate inflation. Else if its nominal discount rate…. See Question 3 2008.
truongdv wrote:
If benifit are indexed to inflation, in should be corporated in discount rate. In this case is 5% included
that depends if it’s real or nominal. if you’re referring to the exam, then i don’t know, because we’re not supposed to discuss it. OP, is it real or nominal? if nominal, then the inflation rate is just to mess with you.