Aligning Investment Strategy with Pension Liabilities

Medium Institutional Portfolio Mgmt Pension Funds

ABC Pension Fund is a defined benefit plan that has a liability-matching investment strategy. The plan’s actuary estimates that the total liabilities will increase at an annual rate of 4% due to benefit accruals and demographic changes. The fund currently has a portfolio that is allocated 60% to equities and 40% to fixed income, with expected returns of 8% for equities and 4% for fixed income over the next decade.

Given the fund's liability structure and the expected returns, the board is considering adjusting the investment strategy. They are particularly concerned about ensuring that the growth in the portfolio's assets is sufficient to match the growth of its liabilities.

Which of the following actions would MOST effectively align the pension fund's investment strategy with its liability profile?

Increase the allocation to equities to 80% to take advantage of higher growth potential.

Shift the portfolio to a 50% allocation to fixed income and 50% to equities to balance growth and stability.

Increase the allocation to fixed income to 60% to ensure more stable returns that closely match the expected increase in liabilities.

Hint

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