CAIA - 04 - Pension Fund Portfolio Management Flashcards Preview

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Flashcards in CAIA - 04 - Pension Fund Portfolio Management Deck (68)
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1

What are the advantages of a pension plan?

 

1. Employee ___

2. Reduced ___ ___

3. ___ - ___

4. ___ of ___

 

 

What are the advantages of a pension plan? 

1. Employee retention

2. Reduced personal savings

3. Tax-deferred

4. Economies of scale

2

There are 3 types of pension plans:

 

1. ___ ___

2. Governmental ___ ___

3. ___ ___

There are 3 types of pension plans:

 

1. Defined Benefit

2. Governmental Social Security

3. Defined Contribution

3

A ___ ___ plan is similar to a traditional DB plan in that assets remain in a single investment pool, but shares the characteristics of a DC plan in that the benefits are maintained in individual record-keeping accounts that show the accrued benefit and facilitate portability.

cash balance plan is similar to a traditional DB plan in that assets remain in a single investment pool, but shares the characteristics of a DC plan in that the benefits are maintained in individual record-keeping accounts that show the accrued benefit and facilitate portability.

4

A DB plan's risk can be measured three ways:

 

1. Asset-___

2. Asset-___

3. ___ asset-___

A DB plan's risk can be measured three ways:

 

1. Asset-focused

2. Asset-liability

3. Integrated asset-liability

5

Under ___-___ risk management, the risk of a DB plan is measured in terms of the volatility of its assets.

Under asset-focused risk management, the risk of a DB plan is measured in terms of the volatility of its assets.

6

Under ___-___risk management, the DB Plan's risk is measured in terms of the volatility of its surplus.

Under asset-liability risk management, the DB Plan's risk is measured in terms of the volatility of its surplus.

7

In an ____ ____ -____ risk management approach, the Plan's funding status and the sponsor's operations are integrated and it is preferred that the surplus be negatively correlated with the sponsor's profitability.

In an integrated asset-liability risk management approach, the Plan's funding status and the sponsor's operations are integrated and it is preferred that the surplus be negatively correlated with the sponsor's profitability.

8

There are 4 key factors that affect the value of a plan's liabilities:

 

1. ___ ___

2. ___

3. ___ ___

4. ___ ___

There are 4 key factors that affect the value of a plan's liabilities:

 

1. Interest rates

2. Inflation

3. Retirement cycle

4. Mortality rate

9

___ ___ are the most important factor that affect liability values 

Interest rates are the most important factor that affect liability values 

10

The value of liabilities are (positively/negatively) correlated with inflation.

The value of liabilities are positively correlated with inflation.

11

The value of liabilities is ___ correlated with the number of future retirees.

The value of liabilities is positively correlated with the number of future retirees.

12

The value of liabilities is (positively/negatively) correlated with mortality rate.

The value of liabilities is negatively correlated with mortality rate.

13

5 factors impact the risk tolerance of plan sponsors:

 

1. ___ status

2. Fund ___

3. Expected future ___ relative to employer ___ ___

4. Employer's ___ ___

5. Employees' ___

5 factors impact the risk tolerance of plan sponsors:

1. Funding status

2. Fund size

3. Expected future contributions relative to employer cash flow

4. Employer's financial position

5. Employees' characteristics

14

Plan sponsors with underfunded DB plans with large deficits tend to have (more/less) risk tolerance

Plan sponsors with underfunded DB plans with large deficits tend to have less risk tolerance

15

Sponsors with large plan liablities relative to the size of their assets have (high/low) risk tolerance

Sponsors with large plan liablities relative to the size of their assets have high risk tolerance

16

Sponsors with large expected future free cash flows compared to projections needed to cover obligations have (higher/lower) risk tolerance.

Sponsors with large expected future free cash flows compared to projections needed to cover obligations have higher risk tolerance.

17

Sponsors with younger employees tend to have a (higher/lower) risk tolerance

Sponsors with younger employees tend to have a higher risk tolerance

18

Some DB plans use a simple strategic asset allocation approach that divides the portfolio into two buckets: a ___ bucket and a ___ bucket.

Some DB plans use a simple strategic asset allocation approach that divides the portfolio into two buckets: a hedging bucket and a growth bucket.

19

The ___ bucket is constructed to simulate the liabilities growth and aims to reduce the volatility of the fund's surplus

The hedging bucket is constructed to simulate the liabilities growth and aims to reduce the volatility of the fund's surplus

20

In the asset-liablity framework, the hedging bucket can be constructed in 3 ways:

 

1. ___ matching approach

2. ___ ___ matching approach

3. ___ approach

In the asset-liablity framework, the hedging bucket can be constructed in 3 ways:

 

1. Duration matching approach

2. Cash flow matching approach

3. Overlay approach

21

In the ___ matching approach, the hedging bucket is constructed so that its duration matches the liabilities. It must be monitored and ___ since changes in the ___ ___ and ___ ___ affect duration.

In the duration matching approach, the hedging bucket is constructed so that its duration matches the liabilities. It must be monitored and rebalanced since changes in the yield curve and credit spreads affect duration.

22

In the ___ ___ matching approach, the hedging bucket is constructed such that its expected future cash inflows match its expected liability cash outflows. This involves constructing a portfolio of ___ ___ bonds that mature on the dates the future payments are needed in amounts equal to those payments.

In the cash flow matching approach, the hedging bucket is constructed such that its expected future cash inflows match its expected liability cash outflows. This involves constructing a portfolio of zero coupon bonds that mature on the dates the future payments are needed in amounts equal to those payments.

23

In the ___ approach, the hedging bucket is constructed using derivatives. The use of derivatives may result in ___ positions, which increases the ___ of the portfolio.

In the overlay approach, the hedging bucket is constructed using derivatives. The use of derivatives may result in leveraged positions, which increases the risk of the portfolio.

24

The ___ bucket is composed of investments that are expected to outperform the plan's liabilities, thus reducing the sponsor's future contributions to the fund. The allocation size depends on the sponsor's propensity to assume ___ risk.

The growth bucket is composed of investments that are expected to outperform the plan's liabilities, thus reducing the sponsor's future contributions to the fund. The allocation size depends on the sponsor's propensity to assume surplus risk.

25

An employee's benefit relative to final salary is referred to as the employee's ___ ___-___ratio.

An employee's benefit relative to final salary is referred to as the employee's retirement income-replacement ratio.

26

A key characteristic of DB plans is that they (are/are not) portable.

A key characteristic of DB plans is that they are not portable.

27

Pension liabilities can be categorized as two types:

 

1. ___ benefit obligation

2. ___benefit obligation

Pension liabilities can be categorized as two types:

 

1. Accumulated benefit obligation

2. Projected benefit obligation

28

What is the equation for calculating change in projected benefit obligations (PBOs) (aka Liabilities)

29

A pension plan's ___ ___ is the amount of its assets compared to its PBO or ABO

A pension plan's funded status is the amount of its assets compared to its PBO or ABO

30

Overfunded plans have a ___ ___

Overfunded plans have a pension surplus

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