The nature of asset backed investments is exactly as you describe,
but it certainly IS possible to deduce that fixed interest securities are
the correct asset class for a fund if that fund is sufficiently in
surplus.
There is no one "correct" asset class.
But the point I have been trying to make, is that to reduce risk, it is best
to "match" the assets to the liabilities - eg if liabilities are *fixed*,
then invest in *fixed* assets; or if liabilities are linked to inflation,
then invest in real assets (index-linked gilts might be best then, if you
can get enough of them!).
If you are 100% invested in Fixed Interest, and inflation / salary increases
suddenly shoot upwards increasing your liabilities, then you can soon have
problems.
With a fund closed to new members (as I think
the Boots scheme is, but I could be wrong) ...
I don't think it is; altho' AIUI, eligibility for entry is quite strict -
must join scheme before age 25 or within 2 years of joining company - so a
GPP (now Stakeholder) was set up to accept employees not eligible to join
the main scheme.
But then, even "closed" funds can have liabilities linked to salary - for
current (already joined) active members.
... then this is even easier. *Every* triennial actuarial review of
a pension fund makes certain assumptions and will predict
a minimum return needed to ensure that the fund can fulfil its
future liabilities based on a certain set of assumptions. It is
perfectly possible for this to provide a 'critical yield' that is
sufficiently low for it to be achieved from Fixed Interest securities.
That "critical yield" will still depend on future salary increases &
inflation. For example, it may be "3% over inflation". Investing in real
assets should be more likely to cover that required yield - if inflation
rises (increasing the required "critical yield") then the value of the
assets should increase too, to compensate.
But if you have "real" liabilities (linked to inflation & salary increases)
and you invest 100% in Fixed Interest (say yielding a fixed 7% pa) - then
you need to be sure that inflation won't exceed, say, 3%. In other words,
you are gambling that your opinion of the future is right....
[As I said before, Boots have been lucky...]