Pension plan return objective and inflation? payments, required, objective, like, single

Viceroy

Hi! There's one solution read like this: "Pension plans do not need to earn inflation premium if they have nominally stated liabilities." So if the retirement payments are not indexed to inflation, in the return objective we can't add inflation to the required return? I thought we have to add inflation in every single case. Please help! Thanks!

Windjammer

In a DB plan, the plan pays out benefits. These benefits may or may not be indexed to inflation. If they are not, then on the liability side, inflation wouldn't matter as much- your DB play says they pay out $100 a month to some guy, doesn't matter if in real terms that turns into 80 or 60, that is what they owe, nominal. However, some plans state that they will pay out benefits "indexed to inflation". here, you have to think in real terms. just like most everything else in L3, you want to match your assets to your liabilities. If your L's are in nominal, then A in nominal works. If your L are in real terms, then you should match your assets in real terms. It's not that scary. The text will be pretty explicit. Last year's test had a q on this- which bonds to buy, real or nominal or whatever- the inst IPS q. Take a look at it.

Zestt

The return objective for pension plans should 99% of the time be to maintain the portfolio value to keep up with the liabilities.

If the liabilities are indexed to inflation, then your return will also have to be. If the liabilities are not indexed to inflation (which is most often the case), then you don't need to have your return indexed to it.


However, your return objective should always be to meet the liabilities of the pension plan.