Again, the goal is to manage the value of the fund’s surplus. Asset-liability management typically involves a high allocation of fixed income instruments. Therefore, an equity-only strategy does not fit best. The value of the assets and liabilities of the fund are sensitive to interest rate changes. Immunization (duration matching) involves matching the duration of the assets with the duration of the liabilities so that the value of the assets and liabilities move together as interest rates change, leaving the surplus (roughly) unaffected. Immunization uses mostly fixed income securities. Although cash flow matching is also a form of asset-liability management, it requires detailed estimates of liability cash flows, which are not available according to the description of the plan |
