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Ch19 - Valuation considerations

Discussion in 'SP4' started by Bharti Singla, Dec 16, 2021.

  1. Bharti Singla

    Bharti Singla Senior Member

    On page9 of this chapter, there is a question:
    Explain why a scheme might invest the majority of its assets in equities?
    Ans.
    Equities may provide a reasonable backing for the liabilities, especially for immature schemes with real liabilities.
    Alternatively, schemes may invest in equities in pursuit of higher expected returns, especially schemes in surplus with a strong covenant    .

    I agree with the second part but struggling to understand the first. Could anyone please explain? What does real liabilities mean here?
     
    Bharti Singla, Dec 16, 2021
    #1
  2. Gresham Arnold

    Gresham Arnold ActEd Tutor Staff Member

    Hi Bharti

    The 'maturity' of a scheme refers to the proportion of the scheme's liabilities that are pensioners. So an immature scheme has a relatively low proportion of pensioner liabilities. Real liabilities are liabilities which are linked to inflation. So essentially this sentence is saying that equities might be a reasonable investment for a scheme that has lots of inflation-linked, non-pensioner liabilities.

    I hope that helps

    Gresham
     
    Gresham Arnold, Dec 16, 2021
    #2
    Bharti Singla likes this.

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