Angus Walker, CFA, is reviewing the defined benefit pension plan of Acme Industries. Based in London, Acme has operations in North America, Japan, and several European countries. Next month, the retirement age for full benefits under the plan will be lowered from age 60 to age 55.

The median age of Acme€™s workforce is 49 years. Walker is responsible for the pension plan€™s investment policy and strategic asset allocation decisions. The goals of the plan include achieving a minimum expected return of 8.4% with expected standard deviation no greater than 16.0%. Walker is evaluating the current asset allocation (Table A) and selected financial information for the company (Table B). There is an ongoing debate within Acme Industries about the pension plan€™s investment policy statement (IPS). Two investment policy statements under consideration are shown in Table C.
a. Determine, for each of the following components, whether IPS X or IPS Y has the appropriate language for the pension plan of Acme Industries. Justify each response with one reason.
i. Return requirement
ii. Risk tolerance
iii. Time horizon
iv. Liquidity
Some components of IPS X may be appropriate, while other components of IPS Y may be appropriate.
b. To assist Walker, Acme has hired two pension consultants, Lucy Graham and Robert Michael. Graham believes that the pension fund must be invested to reflect a low risk tolerance, but Michael believes the pension fund must be invested to achieve the highest possible returns. The fund€™s current asset allocation and the allocations recommended by Graham and Michael are shown in Table D. Select which of the three asset allocations in Table D is most appropriate for Acme€™s pension plan. Explain how your selection meets each of the following objectives or constraints for the plan:
i. Return requirement
ii. Risk tolerance
iii.Liquidity

Table D Current Graham Michael U.K. large capitalization equities U.K.al capitalization equities International equities (MSCI World ex-U.K.) UK bonds Cash Total Expected portfolio return (%) Expected portfolio volatility (standard deviation in %) 30 13 10 42 20 40 10 52 10 100 18 100 100 9.1 16.1 0.6 128 21.1 8.2