Ch19 - Valuation considerations

Discussion in 'SP4' started by Bharti Singla, Dec 16, 2021.

  1. Bharti Singla

    Bharti Singla Senior Member

    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?
     
  2. Gresham Arnold

    Gresham Arnold ActEd Tutor Staff Member

    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
     
    Bharti Singla likes this.

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