Question 1.

(a) Assume a defined contribution plan pension fund with a perfectly balanced position between its invested assets and the present value of its future pension obligations. Over the next year, the management of the pension fund consider several different scenarios:

1. The life expectancy of future pensioners gets longer than previously expected.

2. The discount rate used to compute the present value of future obligations is set to rise.

3. The stock portfolio the fund is invested in will appreciate beyond the prior forecast.

4. Some of the benefits offered to pensioners are going to be cut.

5. The inflation rate of medical care offered to future pensioners gets higher than before.

Analyze under each of the above scenarios whether the fund position will stay balanced, run into a deficit, or become positive, all other things staying equal.