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 28A) and selected financial information for the company (Table 28B). 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 28C.

a. Determine, for each of the following components, whether IPS X or IPS Y (see Table 28C)
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 Note: 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 28D. Select which of the three asset allocations in Table 28D 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 L02