Understanding Immunization in Fixed Income Portfolio Management

Imagine you are the portfolio manager for a pension fund that has a large long-term liability stream, such as retirement benefits that will be paid out to employees over the next several decades. Your goal is to manage the fund's fixed income portfolio in a way that effectively immunizes the liabilities against interest rate changes, ensuring that the fund can meet its future payout obligations.

Discuss the concept of immunization in the context of fixed income portfolio management. Explain how it functions as a liability-driven strategy, including the key principles behind immunization and the potential challenges a manager may face when implementing an immunization strategy.