Chapter 3 provides an understanding of how expected liability cash flows and their present values are calculated and series of future payments are distributed. Readers will understand the difference between nominal, inflation-linked, and real cash flows which have so much effect on the liability hedging strategy. This chapter provides key points regarding liability risks, liability valuation methodologies calculated by actuaries and the potential impact on the investment strategy through practical and easy-to-understand charts. This chapter provides the tools to negotiate a more appropriate discount margin with actuaries and, as a result, get an amount of contributions which maximize expectations. This chapter is an important step in understanding the liability driven investment techniques.
Keywords: accounting basis (IAS19), actuarial valuation, actuaries, buyout (Section 75), discount factor, liability sensitivities, nominal, real and break-even inflation rates, protection pension fund (PPF), technical provisions, volatility of liabilities
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