economic concepts

there is a question on the self test in schweser that says, if we predict inflation will rise, which types of accounts are most at risk?

a)defined benefit plan

b)individual investors

c) Property and casualty insurers

the answer they had was B but i’m think it can also be C. PPC firms are hurt with rising inflation, right?


why can’t it be A? Shouldn’t pension plans first objective is to hedge liability against inflation ?

i not stated directly, pension liability is usually NOT indexed with inflation.

DB pension plans return objective is to FUND pension liabilities on a inflation adjusted basis.

That is not guaranteed unless stated expressly . The default is the promise of nominal payments i.e. to pay fixed amounts upon retirement based on service length , last pay etc.

So inflation is going to make the pension DB fund happy because they can inflate away their obligations i.e. the discount rate is larger. Today’s typical DB plan in much orse off because inflation is so low.

this is stated clearly in CFA curriculum book