Pension fund liabilities and asset matching

Document description

The concept of matching assets and liabilities has for many years been recognized as a crucial aspect of our professional work. A particular form of matching, namely immunization, was developed by F M Redington (JIA 78). Immunization signifies the investment of assets in such a way that the existing business is immune to a change in the rate of interest. One of the consequences of immunization is that the mean term of the asset-maturity dates is appreciably longer than the mean term of the value of the asset-proceeds and of the liability-outgo; and, at other than low rates of interest, a perpetuity can be too short to immunize a long-term contractual liability. The mean term of the liability-outgo of pension funds is generally longer than that of the business on a life office’s books and, even if no specific attempt is made to achieve a measure of immunization, it is often suggested that the general policy for a pension fund should be to invest in long-term assets. However, the liabilities of the majority of pension funds are to a large extent ‘real’ liabilities (for example, dependent on future pensionable salaries) whilst the contractual liabilities under life office contracts are fixed in money terms. Is the same long-term investment philosophy necessarily appropriate to both pension funds and long-term insurance business? And can conflicts of interest arise between the asset needs of pension funds and those of pension contracts issued by life offices to correspond with the funds’ liabilities? The purpose of this paper is to examine these issues and to discuss certain other implications of the problem of providing benefits in real terms.