Asset/Liability Modeling & LDI


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The market downturns of 2000-2002 and 2008 took a heavy financial toll on many pension plan sponsors and illustrated the importance of managing pension plan assets in the context of the pension liability.

With specialized expertise in both assets and liabilities, Milliman offers the most sophisticated asset-liability modeling in the industry. Our analysis quantifies the potential financial impact of the pension plan on the plan sponsor and is tailored to our clients' specific circumstances, liability characteristics, and financial objectives. Given our expertise in capital markets, actuarial science and simulation, we are more quantitative in our approach than many other firms in either the investment consulting or actuarial arenas.

Asset-liability modeling (ALM)

ALM is a tool that shows pension plan sponsors the potential consequences of different investment strategies. Those consequences include the plan's future funded status and resulting contribution requirements.

ALM allows a plan sponsor to coordinate investments with plan liabilities in order to achieve desired financial goals. Those financial goals often involve finding the best combination of reduced risk and maximized investment return. Investment managers can then implement strategies that are projected to meet those financial goals.

Liability-driven investing (LDI)

LDI is an application of ALM to investment management. LDI emphasizes reducing the volatility of a plan's funded status and contribution requirements. For example, a common LDI strategy for corporate pension plans is to buy a portfolio of high-quality bonds with durations matching those of plan liabilities. This way, the sensitivity of the market value of assets to interest rate changes closely matches that of the liabilities. The investments and liabilities move in tandem, and the net funded status stays relatively consistent from year to year.

Public sector and multiemployer pension plans are funded and accounted for using long-term assumptions, so the interaction of interest rates with plan liabilities is indirect. However, LDI can also be applied to these sponsors by matching liabilities with appropriate assets. For example, as plans mature, sponsors can shift a greater portion of assets to fixed income products that will fund retirees’ benefits in a predictable manner.