EV: reducing the investment return assumption Mock Exam A 4.ii.b

[FlappyBird]

Hello

In the mock exam A, q.4.ii.b, the investment return assumption is reduced in the projection basis for a without-profits annuity.

The model solutions says
a. current PVIF falls since future surpluses are less
b. current net assets are unchanged

I am not sure I agree because:
a. with the PVIF, in a matched portfolio (which annuities usually are), the bonds have already been bought, so our future coupon payments are guaranteed

b. current net assets are only unchanged if there is perfect matching in the portfolio. If the discounted mean term of the assets is greater than the discounted mean term of the liabilities, we are long in interest rates, and a fall in rates reduces net asset value.

Could someone explain please?

Thanks

 

[Muppet]

I think you're being too clever!!

In a. if you are saying that future investment return is fixed then we wouldn't need an assumption and we wouldn't be able to change it. You've got to go with what it says in the question and let the future investment return assumption reduce.

In b. we don't know what has happened to actual interest rates, just that we are changing an assumption in the model. (Not a ridiculous scenario to think through but answer the question first.)
So reasonable to assume that asset values don't change, and if we aren't changing our reserving assumptions then liabilities don't change either. Hence net assets don't change.