IFoA SA7 common mistakes
IFoA SA7 · Understand the traps and how to avoid them.
Writing a generic essay on 'economic factors affecting markets' instead of applying the specific scenario's liability profile, currency, and time horizon to the investment decision asked for.
Candidates memorise macro theory and reproduce it because it feels safe, but SA7 marks are awarded for applying knowledge to the scenario, not reciting it.
What to do instead
Before writing, extract the scenario's key facts (liability timing, currency mismatch, solvency position, tax status) and make each paragraph answer 'so what does this mean for THIS scheme/insurer'.
Quoting a duration or convexity figure without stating the convention (Macaulay vs modified, years vs basis points) or the units of the answer.
Under time pressure candidates copy formulas from memory and skip the definitional step, then lose method marks even when the arithmetic is right.
What to do instead
State the formula, define each term, show one line of substitution with units, and give the answer with a unit and a sanity check (e.g. modified duration should be slightly less than Macaulay duration).
Producing an asset-liability model answer that lists asset classes and expected returns but never links the liability cash-flow profile, funding level, or risk appetite to the chosen strategy.
Candidates treat ALM as a portfolio-construction question and default to mean-variance thinking, ignoring that the liability is the benchmark.
What to do instead
Structure the answer as: liability profile → surplus/funding risk measure → candidate strategies → impact on surplus volatility and funding ratio → recommendation with monitoring triggers.
Giving a single-point answer to a risk-management question (e.g. 'use an interest rate swap') without specifying direction, notional, tenor, and what risk remains after the hedge.
Candidates identify the tool but stop short of the implementation detail that distinguishes a pass from a distinction.
What to do instead
For every hedge recommendation, state pay/receive leg, notional relative to exposure, tenor vs liability duration, basis and counterparty risk retained, and collateral/collateral-cost implications.
Calculating performance attribution by subtracting benchmark return from portfolio return and stopping there, without decomposing into allocation, selection, and interaction (or currency and timing) effects.
Candidates conflate 'active return' with 'attribution' and run out of time to do the Brinson-style decomposition properly.
What to do instead
Show the decomposition table explicitly: for each sector give portfolio weight, benchmark weight, portfolio return, benchmark return, then allocation, selection, and interaction terms, and reconcile the sum to total active return.
Treating regulatory capital and accounting treatment as background colour rather than as constraints that change the optimal investment strategy (e.g. recommending equities without discussing SCR charge or matching adjustment eligibility).
Candidates separate 'technical' investment content from 'regulatory' content and bolt regulation on at the end, so recommendations are internally inconsistent.
What to do instead
For each recommendation, add a sentence on capital charge, accounting volatility, and regulatory eligibility (e.g. matching adjustment asset eligibility, MA portfolio cash-flow matching), and adjust the recommendation if the constraint bites.
Valuing an illiquid asset (property, private equity, infrastructure) using a single discount rate or cap rate without discussing valuation uncertainty, smoothing, and liquidity premium.
Candidates apply equity-style DCF habits to illiquid assets and ignore that reported valuations are appraisal-based and stale.
What to do instead
Value with an explicit cash-flow model, then add a paragraph on valuation basis (desktop vs full appraisal), smoothing and de-smoothing, liquidity/illiquidity premium, and how the valuation feeds into solvency and reporting.
Ignoring behavioural and governance dimensions when the question asks for a recommendation to a trustee board or investment committee, giving a purely quantitative answer.
Candidates see the numbers as the 'real' answer and treat behavioural finance and governance as soft add-ons, missing marks reserved for them.
What to do instead
Add a short section covering biases at play (anchoring, herding, loss aversion, home bias), governance structure (delegation, conflicts, TCFD/Stewardship reporting), and how the recommendation mitigates them.
Answering an ethics or professional-judgement question by naming the principle (e.g. 'act with integrity') without applying it to the specific facts, identifying the conflict, and stating the action to take and to whom to escalate.
Candidates reproduce the Code of Conduct as a list and do not practise applying it to scenario facts under exam conditions.
What to do instead
Use a fixed structure: identify the issue → relevant principle(s) → who is affected → options → recommended action → escalation/reporting route, all tied to named facts in the scenario.
Running out of time because the candidate spends too long on the first long calculation and leaves the later discursive and 'explain' marks unattempted.
Candidates allocate time by question order rather than by marks, and calculations expand to fill the time available.
What to do instead
Do a 60-second mark audit at the start (marks per question), cap calculation time at roughly one minute per mark, and if stuck move on and return; always attempt the discursive parts because they carry guaranteed method marks.