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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Financial instruments and insurance contracts as cashflow models

Which feature of index-linked government bonds or inflation-linked real assets such as property makes them attractive to a pension fund with inflation-linked liabilities?

Inflation-linked assets, including property whose rents tend to rise with prices, produce cashflows that increase with inflation, so they help match liabilities that also grow with inflation. They still carry market risk and, for property, illiquidity.

  1. ATheir cashflows tend to rise with inflation, so they help match liabilities that increase with inflationCorrect
  2. BThey have no credit or market risk of any kind
  3. CTheir capital value is always fixed in nominal terms
  4. DThey are perfectly liquid and can be sold instantly at no cost
  5. They pay a fixed nominal income regardless of inflation

Explanation

Rents and index-linked payments tend to rise with inflation, giving a better match to inflation-linked liabilities. Property is illiquid and has market risk, and fixed nominal income would not match.

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