Frozen pension plan

CFA Level III
#1

When pension plan is frozen, no equity is beeded because liquidity nees are very high.

Is this statement correc? If yes, what kind of investments are nedded in this situation?

#2

with a frozen pension plan - there are NO new employees being added to the existing plan.

If wage growth is also frozen for employees already in the plan - then no equity is needed because Growth factor is provided by the equity.

No growth - Nominal bonds - handle the inflation changes, Real Bonds - handle the term structure of interest rates changes.

If there is wage growth as well - needs equity.

So I do not believe it has anything to do with liquidity needs, directly at least.

#3

^ How does the change in term structure of interest rates influence benefits paid to employees? Is the interst rate used as a discount rate to calculate PV of future obligations?

#4

it decides the rate used for discounting. And considering these benefits paid are liabilities - the pension fund would “defease” these using assets (which is what you are also considering).

So changes in the term structure would be used to perform PV of the liabilities as well as PV of assets - and the two would move lock in step.

#5

Thanks, just another question,

For the retirees, if their benefits are indexed to inflation, it means the benefits they received are inflation protected right? Is it nominal bond or real return bond that is needed?

I mean, if sth is inflation protected, doesn’t it mean that its value grows with inflation (hench real return)?

I am just always confsued when it comes to retirees and nominal bonds…

#6

Yes it means that they recieve (at least) the rate of inflation.

The IPS would state a real return in this case, but the fund doesnt’ necessarily have to use TIPS or simillar full inflation hedging instruments.