inflation and plan benefits hold, better, benefits

John10

if plan benefits are not inflation indexed, is it better to hold real rate bonds or nominal rate bonds?

bkballa

is inflation indexed = real

strikethree

i thought your equity portion would be an inflation hedge already

plus, if your plan is not linked to inflation, and you match this with TIPS, you are screwed when inflation rate < the nominal rate on the annuities.

dyga

Nominal = for what has accrued so far
Index-linked= even if the plan is frozen, it has members who still continue to work and their wages will increase in the future. Some of the wage increases will due to inflation.

PalacioHill

but why does it say in the CFAI book p. 450, first paragraph:

"For frozen busines plans the accrued benefit liablity is the ultimate liablity of the plan and has market exposures that are best mimicked by a cominbation of nominal and index-linked bonds."

please clearify!
thank you!

mik82

not indexed to inlation = nominal

indexed to infation = both real and nominal

future wage inflation = real bonds

future wage growth = equities

Iginla2011

There is confusion here.

The key of the question is how to mimic the plan benefits if it is not inflation-indexed. Pls be noticed that you are in the perspective of a plan manager not the beneficiary.

For a plan manager, you have to control the risk from deviating from the benchmark. The plan benefit for retired people is fixed in amount. The future annuity payment is fixed. This is similar to the coupon payment of a nominal bond. Thus, nominal bond best mimic the liability

NakedPuts00

1 if the plan is frozen, and benefit is not inflation indexed NOMINAL
2 if the plan is frozen, and benefit is inflation indexed REAL
3 if the plan is not frozen, and benefit is not inflation indexed BOTH
4 if the plan is not frozen, and benefit is inflation indexed REAL

With number 3, you hold accrued amount and future amount based on current wage in nominal, you then will hold the future amount from wage increases in real as wage growth will track closely with inflation.

liangfeng

nominal pls

if the nominal value of benefits is not indexed to inflation, you want to meet these liabilities with assets that are not indexed to inflation either, nominal bonds

bodhisattva

but in the question above, it says the plan is frozen. doesnt that mean there is no more wage increases?