actuarial present value of future plan cash flows, discounted at current interest rates. Thus, asset/liability management strategies often include bonds and swaps or other derivatives to accomplish some degree of interest rate hedging (immunization, cash flow matching, duration matching, etc.). Such approaches are sometimes called “liability-driven investment” (LDI) strategies. In 2008, plans with such approaches strongly outperformed those with traditional “total return” seeking investment policies. Asset/liability studies Successful asset/liability studies: Increase a plan sponsor’s understanding of the pension plan’s current situation and likely future trends Highlight key asset and liability risks that should be considered Help establish a cohesive risk-management framework Analyze surplus return, standard deviation, funding status, contribution requirements and balance-sheet impacts Consider customized risk measures based on the plan sponsor, plan design and time horizon Help design an appropriate strategic investment strategy Provide insight into current market dislocations and practical implications for the near term Historically, most pension plan sponsors conducted comprehensive asset/liability studies every three to five years, or after a significant change in demographics, plan design, funding status, sponsor circumstances, or funding legislation. Recent trends suggest more frequent studies and/or a desire for regular tracking of key asset/liability risk metrics in between formal studies. Additional challenges In the United States, the Pension Protection Act of 2006 (PPA) introduced stricter standards on pension plans, requiring higher funding targets and larger contributions from plan sponsors. With growing deficits and PPA funding requirements looming large, there is an unprecedented need for asset/liability modeling and overall pension risk management. Asset/liability modeling for individuals Some financial advisors offer Monte Carlo simulation tools aimed at helping individuals plan for retirement. These tools are designed to model the individual’s likelihood of assets surpassing expenses (liabilities). Proponents of Monte Carlo simulation contend that these tools are valuable because they offer simulation using randomly ordered returns based on a set of reasonable parameters. For example, the tool can model retirement cash flows 500 or 1,000 times, reflecting a range of possible outcomes. Some critics of these tools claim that the consequences of failure are not laid out and argue that these tools are no better than typical retirement tools that use standard assumptions. Recent financial turmoil has fueled the claims of critics who believe that Monte Carlo simulation tools are inaccurate and overly optimistic. See also Net worth High-net-worth individual References External links Implementing Asset/Liability Management - A User’s Guide to ALM, LDI and Other