This is 2012 past paper. Question asks to calculate the return requirement for the Defined benefit pension plan given:
- Discount rate applied to determine the PV of plan liabilities = 5%
- Expected average annual inflation rate = 1.25%
Can someone please explain further why we don’t include inflation in the return requirement?. E.g. why is return not (1.05)x(1.0125).
Answer says: the minimum return requirement for the Plan is 5% because this is the rate that is used to calculate the present value of liabilities. (Note that the expected future liabilities already incorporate expected inflation-related adjustments to benefits for Plan participants.