does anybody know, can a pension fund adopt an asset allocation approach? obviously pension funds have liabilities so i dont see how they can and it seems to me that they either an integrated or liability relative approach but there was a question about it in one of the practice papers that got me confused
A pension fund can adopt a liability-relative approach via a hedging and return seeking portfolio. The hedging portfolio will (fully) hedge the liabilities, and the remainder of funds is allocated to the return seeking portfolio. The latter can be optimized using asset-only MVO since liabilities were already accounted for in the hedging portfolio.
In an integrated ALM approach, both assets and liabilities are ‘flexible’. It’s more appropriate for banks that can change both their assets (loans they issue) and liabilities (deposits they accept). The integrated approach will match assets and liabilities simultaneously, while liability-relative will take liabilities as a given and optimize the assets to those liabilities.