Help on DB asset allocation

CFA Level III
#1

Can anyone point me the direction on the use of equity, nominal bonds and real rate bonds I am really confuse about this. IMO allocation to equity is good when the plan is open to new entrants or there is active employees. allocation to Nominal bonds is good when the plan is not inflation indexed. allocation to Real rate bonds is good when plan is inflation indexed and mimic the active employees’ earnings growth (inflation part) do I sound right? or did I miss anything? Thanks in advance

#2

I dont think there is an ideal allocation with regards to no. of active employees. I thought you are referring to the best benchmark for each case.

#3

yes, I think it’s also the benchmark to different types of DB liabilities, I am just sorting out under which condition would one type of asset be prefer over the other. specifically, I am referring to question 3 on 2010 essay paper

#4

Inactive employees Term Structure - Nominal Bonds Active employees (Accrued) Term Structure - Nominal Bonds Active employees (future wage) Inflation - Real rate bonds Growth - Equities Term Structure - Nominal Bonds

#5

I think you are on point Panda… Equities will mimic the real growth part of employees wage increases Real bonds will mimic the inflation part of liabilities (if indexed to inflation) and the inflation piece of employee wage increases Nominal bonds will just mimic the base liability. “Idreesz says: Inactive employees Term Structure - Nominal Bonds” What if the benefit is indexed to inflation?

#6

june2009 Wrote: ------------------------------------------------------- > I think you are on point Panda… > > Equities will mimic the real growth part of > employees wage increases > > Real bonds will mimic the inflation part of > liabilities (if indexed to inflation) and the > inflation piece of employee wage increases > > Nominal bonds will just mimic the base liability. > > “Idreesz says: > Inactive employees > Term Structure - Nominal Bonds” > > What if the benefit is indexed to inflation? Oops. yes inactive employees liabilities can be linked to both real and nominal bonds only if the plan provides for inflation indexing. Thanks for pointing that out.