Final answer:
The return objective for the pension fund is closest to the discount rate used to compute pension obligations, which is 5.95%. This rate considers various factors like future market conditions and pension plan liabilities, and is crucial in ensuring the fund can meet its future obligations and maintain the retirees' standard of living despite inflation.
Step-by-step explanation:
When determining the return objective for a pension fund, it is crucial to consider several factors, such as the risk-free rate, the average return of relevant benchmarks like the S&P 500, the expected inflation rate, and the discount rate used for computing pension obligations. Given that the discount rate represents the return that the pension plan's investments need to earn to meet future liabilities, and factors in expectations about future market conditions and the plan's specific liabilities, the return objective for the pension fund is typically aligned with this rate. Thus, the return objective for the pension fund would be closest to the discount rate used to compute pension obligations, which in this case is 5.95%.
Understanding the interplay between inflation and fixed incomes highlights the importance of pension fund management. If benefits remain fixed, inflation erodes the buying power over time, creating a need for pension funds to seek adequate returns that at least match inflation and preferably exceed it to maintain retirees' living standards.
The modern shift from defined benefit plans to defined contribution plans like 401(k)s and 403(b)s alleviates some of the inflation risk for retirees. Workers in defined contribution plans invest their retirement savings across a range of vehicles, aiming for real rates of return that compensate for inflation, providing more control over their future income relative to traditional pension plans.