Ch19 - Valuation considerations

[Bharti Singla]

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?

 

[Gresham Arnold]

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