Current retirees and deferred retirees ?

CFA Level III
#1

Are their payments to be matched using nomial or real bonds?

#2

i have not seen the term “current retirees” used.

inactive participants = deferreds (who used to work in the past in the company, are due retirement benefits, but will not get them till way in the future) and retireds (who are eligible for retirement benefits) .

for both of these - assuming no inflation adjustment - payments are fixed in nominal terms. so they can be mimicked by nominal bonds.

if inflation is included - combination of real bonds and nominal bonds.

active participants

2 components to their benefits

  1. accrued - fixed in nominal terms - so nominal bonds.

  2. future wage growth - in line with GDP growth - so equity.

  3. future wage inflation - real bonds.

#3

It depends on whether the benefits are indexed to inflation.

If they are not then for that portion of the benefits there is no need for Real return bonds and they will be matched with nominal bonds

If they are indexed to inflation then it is a combo of both with real return usually being the larger portion.

The nominal bonds cover the payment structure and the real return cover the inflation portion.