On page9 of this chapter, there is a question: Explain why a scheme might invest the majority of its assets in equities? Ans. Equities may provide a reasonable backing for the liabilities, especially for immature schemes with real liabilities. Alternatively, schemes may invest in equities in pursuit of higher expected returns, especially schemes in surplus with a strong covenant. I agree with the second part but struggling to understand the first. Could anyone please explain? What does real liabilities mean here?
Hi Bharti The 'maturity' of a scheme refers to the proportion of the scheme's liabilities that are pensioners. So an immature scheme has a relatively low proportion of pensioner liabilities. Real liabilities are liabilities which are linked to inflation. So essentially this sentence is saying that equities might be a reasonable investment for a scheme that has lots of inflation-linked, non-pensioner liabilities. I hope that helps Gresham