Chapter 17

Question 1

You are the actuary to a retirement fund that has recently undergone a conversion from a
defined benefit to a defined contribution structure.
i. Outline the factors you would consider when determining the investment strategy in a
defined benefit fund. [8]

Answer 1

• Overarching principle is to have the highest chance of being able to meet benefit obligations
• With the lowest possible level of risk
• The strategy should consider the term and nature of the liabilities
• Which is most likely to be long-term
• And real in nature in a defined benefit fund.
• The level of assets available
• And the funding level should be considered
• These will dictate the risk appetite to an extent
• (For example, more risk averse is funding level is close to required level)
• And whether pooled or segregated assets should be incorporated
• The strength of the sponsor convenant should be considered
• If the sponsor covenant is weak this may lead to more risk aversion in the investment strategy
• The costs involved in the management of the strategy
• And any movements into and out of assets should be considered
• Lower cost strategies are likely to be considered more appropriate
• Legislation may limit the type of assets
• And the level of assets that can be invested in certain
• Asset classes
• And types of investment within asset classes
• Tax implications should be considered
• For example income versus capital gains tax applications
• May lead to a skewness towards a certain type of investment.
• An ALM can be used to determine the most appropriate strategy.