Linking pension liabilities

Hi All,

The inflation indexed benefits are hedged using real return bonds. What is real retrun bonds? Inflation taken out? Can anybody explain this?

Thanks in advance.

iirc the real return bonds is also inflation indexed bonds…coupons are adjusted for say 1% real return + the inflation % for that period

Yes: real return bonds are, for example, TIPS.

Thanks for making it clear.

You’re welcome.

just to be clear , in TIPS it is the principle that is adjusted for inflation . The coupon rate remains same so , yes , the coupon amount goes up as inflation picks up .

If inflation decreases as has happened recently the principle does not go below the original amount at the time the TIPS was issued so there is some downside protection too.

There are some tax issues with TIPS ( you may have to pay taxes for a rise in principle i.e. a capital gain , this year , even though the gain is realized only at maturity which may be several years away )