dear all
I worked on the Q bank questions and came across question 465322 which reads :
which of the following pension plan segment obligations would not be hedged by the liability relative portfolio? The segment exposure not hedged is that from :
a) future participants
b) future wage growth
c) inactive participants.
the correct answer is indicated as being A.
the explanation states as follows: the payments to inactive participants and the accruals to active participants for past service constitute accrued benefits will be hedged with nominal bonds if they are not indexed to inflation. a pension’s future obligations are those arising due to wages to be earned in the future, future service rendered and future plan participants. the first component is typically hedged with equities, nominal and real bonds . the latter two components are uncertain and not easily modeled or funded,
I’m confused…
when they state “liability relative portfolio” do they mean “asset - liability portfolio” or liability mimicking portfolio? The reason I’m asking is because I thought that asset-liability portfolio approach just looked at choosing the most efficient portfolio out of many without regards to liability to be covered.