Duration Matching Strategies for Pension Funds

A pension fund manager is tasked with matching the duration of the fund's fixed income portfolio to the duration of its projected liabilities, which are largely comprised of future pension payments. The current liabilities are expected to be paid out over the next 20 years, with a weighted average duration of 10 years.

The manager considers three different strategies for duration matching: purchasing a series of zero-coupon bonds maturing in 1-year increments, investing in a laddered portfolio of coupon-bearing bonds with similar maturities, and using interest rate swaps to adjust the duration of an existing bond portfolio. The key objective is not only to match the duration but also to ensure adequate cash flow coverage for the upcoming liabilities.

Which of the following strategies would provide the best alignment with the fund's liability duration profile, while considering stability of cash flows and minimizing reinvestment risk?