Chapter 18 - A scenario approach of ALM

Abstract

Asset liability management (ALM) is very important in the strategic decision making of liability driven organizations, especially pension funds, insurance companies, and banks. This chapter deals with three components of ALM for pension plans—the ALM decision problem, the ALM methodology, and ALM in practice. It describes and demonstrates that the quintessence of the full-scale ALM decision problem is that risk budgets of all stakeholders and all available policy instruments are taken into account to accomplish adequate pensions at acceptable cost and risk. In practice, this implies that ALM leads to an optimal integral pension-, contribution-, and investment policy, recently frequently referred to as the Pension Deal. Also, since the integral approach implies that the strategic asset allocation is evaluated in terms of the costs, benefits, and risks of the beneficiaries, ALM can be seen to encompass what in the investment community recently has been introduced as liability-driven investing. In the ALM-methodology to accomplish this objective, a central role is played by scenario analysis, sustained by optimization methods.