Defined Benefit Pension Plans

If the majority of the plan participants of a DB plan are ACTIVE, the majority of the plan assets should be in equities, then this would adhere to the ALM approach. Agree/Disagree?

Wouldn’t an ALM approach involve investing in assets that are highly correlated with liabilities? The nature of liabilities in a DB plan with a large amount of active participants would imply investing in longer term fixed income securities…nontheless since the duration of liabilities are longer higher risk tolerance also warrants more risky investments such as stocks…

well… long term liabilities require real growth to be matched in an ALM approach, thus nominal bonds are not sufficient. Real bonds are good for real growth, equities are good for matching income growth component.

I agree, I recall a past exam where a company was a hi-tech company, majority of participants active, few retired, so the asset allocation was majority to equities. real growth bonds used if benefits are indexed to inflation, nominal bonds used if benefits are not. what do you think?

if benefits are NOT indexed to inflation, there is no need for real return bonds.

more ctives, more equities

more deferreds and retirees with inflation indexed benefits then more real rate bonds.

If there is little future real rate growth, then smaller equities required

have to think of active accrued (already earned by currently working employees) vs those benefits that will grow with inflation. If the active accrued benefits are indexed to inflation, real rate bonds.

The benefit for active participants has to be broken into already accrued and to be earned.

already accrued for both active and non active - nominal bonds (assume benefit not indexed)

active not accrued benefits is a mix of nominal bonds, inflation indexed bonds (hedge inflation) and equities (hedge growth).

Other stuff like new entrants etc isnt normally hedged.

So yeah if the company/economy was experiening massive growth then you would load up on equities. The less growth and inflation the more nominal bonds you would have to hedge non accrued benefits.

guys, you are all over the place on this one, which asset class do you invest the most in and which do you invest the least in

Most: Nominal Bonds

Least: Equity

The real growth of wages component was the least amount 5%, and is the only component that includes equities. Real bonds are predominately used to index to inflation and this was the second lowest component even after they stopped indexing them.

Whether it is right… who knows. This entire test seems way more vague then I originally thought.

Equities are for wage growth, not wage inflation. (p.492).

If the benefits were inflation indexed and remained so up until the cutoff date, then the already existing accrued benefits and real wage inflation portion of the liability would represent the largest part (real bonds). Im about 80% certain that nominal is not the largest allocation. Then the smallest allocation would have been equities, since the rest are mimicked by nominal…


agreed. largest: real bonds. smallest: equities.

Most real rate and least equities. Deferred and retirees, were both inflation indexed

put simply, if benefits are indexed to inflation, then real bonds are needed. if not, then no, you fund using nominal bonds and equities. nominal bonds will dominate in ALM approach.