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Question

A pension fund has to pay out benefits at the end of each of the next 40 years. The benefits payable at the end of the first year total £1 million. Thereafter, the benefits are expected to increase at a fixed rate of 3.8835% per annum compound. The pension fund can invest in both coupon-paying and zero-coupon bonds with a range of terms to redemption. The longest-dated bond currently available in the market is a zero-coupon bond redeemed in exactly 15 years.

Explain why it will not be possible to immunise this pension fund against small changes in the rate of interest.

Describe the other practical problems for an institutional investor who is attempting to implement an immunisation strategy

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