IFoA SP5 common mistakes
IFoA SP5 · Understand the traps and how to avoid them.
Writing answers that describe the theoretical properties of an asset class (e.g. that property is illiquid and lumpy) without ever applying them to the specific fund, liability profile or time horizon given in the scenario, so the marker cannot award application marks.
Candidates under time pressure default to book knowledge they can recall fluently, because recall feels productive and application requires slow re-reading and judgement. SP5 questions are written so that generic statements are explicitly unrewarded, and candidates often do not realise the marks sit in the link between fact and scenario.
What to do instead
Before writing, underline the scenario-specific facts (liability timing, risk appetite, regulatory constraint, existing holdings) and force every paragraph to end with a sentence of the form 'For this fund, this matters because...'. Practise by taking a past-style scenario and writing only the application sentences, then discarding any sentence that would be true of any investor.
Producing a list of unconnected bullet points covering many asset classes without quantifying or comparing them, so no recommendation or ranking emerges and the answer reads as a glossary rather than advice.
Bullet lists are fast to write and feel comprehensive, and candidates fear that committing to a single recommendation risks losing marks if they choose wrongly. In practice SP5 rewards reasoned comparison and a defensible conclusion, and an unranked list cannot demonstrate the judgement being tested.
What to do instead
Adopt a fixed structure for advisory questions: criteria (return, risk, liquidity, governance, cost), then a comparison table scoring each option against those criteria, then an explicit recommendation with the two strongest counter-arguments and a response to each. Even where the question does not demand a recommendation, state which option is preferable and why.
Treating the actuarial valuation basis, the accounting basis and the regulatory/regime basis as interchangeable, for example using a gilt yield as the discount rate for a scheme's technical provisions without stating the basis or justifying the margin.
The same discount rate, inflation assumption and asset value appear in several contexts with different purposes, and candidates revise each in isolation so the distinctions blur under exam pressure. Scenario wording often signals the basis only indirectly (through the regulator, the sponsor or the funding objective), and that signal is missed.
What to do instead
Build a one-page comparison of the bases you are likely to meet (funding/technical provisions, accounting disclosure, buy-out, regulatory capital), listing for each: purpose, discount rate convention, treatment of prudence, and who uses it. In the exam, write the basis explicitly in the first line of any calculation or recommendation and check the scenario for the decision-maker's identity.
Performing a calculation (duration, liability hedging ratio, required contribution, expected return) and then failing to interpret the result, or reporting a number with no units, no sign convention and no statement of what it implies for the decision.
Candidates allocate time to arithmetic and run out of time or mental energy for the interpretation, and some believe the number is the answer. Markers award comparatively few marks for the arithmetic itself and most for what the candidate concludes from it.
What to do instead
Adopt a discipline of always writing one sentence after any number: what it means, whether it is large or small relative to a benchmark or the liability, and what action follows. Reserve the last five minutes to revisit each calculation and add that sentence if missing; a bare number should be treated as an unfinished answer.
Ignoring the liability side entirely when answering an asset allocation or manager selection question, recommending a portfolio on risk/return grounds alone with no reference to the liability cash flow profile, duration or funding level.
Asset management material is taught and revised in asset-centric terms, and candidates carry that framing into the exam. Many SP5 scenarios are liability-driven, so an asset-only answer forfeits the marks that distinguish a strong script.
What to do instead
Before answering any investment question, write down the liability characteristics (timing, inflation linkage, uncertainty, funding level) in the margin, and require every recommendation to reference at least one of them. If the scenario gives no liability detail, state the assumption you are making and its effect on the recommendation.
Discussing diversification, correlation and risk only qualitatively, asserting that diversification helps, without identifying which risks are being diversified, whether correlations are stable in a crisis, or what the resulting portfolio volatility or concentration actually is.
Qualitative statements are easy to produce and feel safe, and candidates are often unsure how much quantitative risk analysis is expected. As a result they avoid stating correlation assumptions or numbers, which are precisely what the question is probing.
What to do instead
For any risk question, structure the answer as: sources of risk, which are diversifiable and which are not, the correlation assumption relied upon and its weakness in stress, and a quantification (even approximate) of the residual risk. Practise stating correlation and volatility assumptions explicitly rather than hiding behind the word 'diversification'.
Recommending a derivative overlay or hedging strategy without specifying the instrument, tenor, notional, collateral and counterparty arrangements, and without acknowledging basis risk, so the answer stays at the level of 'use swaps to hedge'.
Candidates know the concept of hedging but have not rehearsed the operational detail, and they underestimate how much of the mark scheme rewards practical implementation. Naming a strategy feels like a complete answer, so the candidate moves on.
What to do instead
Prepare a checklist for any hedging answer: objective and risk being hedged, instrument and market, tenor versus liability horizon, notional and rollover, collateral and liquidity demands, counterparty and documentation, accounting impact, and residual basis risk. Run every hedging question through the checklist and state each item briefly even where the scenario is silent.
Failing to adapt the answer to the investor type in the scenario, giving a UK defined benefit pension scheme the same advice as a retail investor or a with-profits life fund, with no reference to tax status, regulation, governance capacity or time horizon.
Candidates prepare generic investment content and reproduce it regardless of the entity described, because the entity's constraints are scattered through the scenario rather than stated as a list. The differences between investor types are exactly what examiners test.
What to do instead
At the start of each answer, write a short profile of the investor: objective, horizon, liquidity needs, tax position, regulatory regime, governance and risk capacity. Then check that each recommendation is consistent with that profile, and delete any point that would apply equally to every investor type.
Presenting only the advantages of a proposed approach, with no acknowledgement of drawbacks, risks or circumstances in which it would fail, so the answer appears one-sided and misses the evaluation marks.
Candidates write what they are confident about and avoid raising weaknesses for fear of undermining their own recommendation. Exam questions at this level almost always reward balanced evaluation, and the missing counter-argument is a predictable loss.
What to do instead
For every recommendation, deliberately write two limitations and a mitigation or condition under which the advice would change. Frame this as strengthening rather than weakening the argument: 'This is preferred because X, though it exposes the fund to Y, which can be managed by Z.'
Running out of time because the candidate spends disproportionate effort on early calculation-heavy parts and writes nothing for the final discursive section, or writes at excessive length on a low-mark sub-question.
Calculations feel concrete and candidates want to get them right, so they over-invest; discursive parts feel open-ended and are deferred. Mark allocation per minute is rarely rehearsed, so pacing is improvised on the day.
What to do instead
Rehearse with timed mock papers, allocating minutes in proportion to marks (roughly one minute per mark plus reading time) and enforcing a hard stop per question. Practise leaving a calculation once a defensible answer is reached, flagging it, and moving on, returning only if time permits.