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OR PRACTICE—Assisting Defined-Benefit Pension Plans

Department of Operations Research and Financial Engineering, Bendheim Center for Finance, Princeton University, Princeton, New Jersey 08544
Faculty of Management, Sabanci University, Orhanli, 34956 Tuzla, Istanbul, Turkey
BlackRock Financial Management Inc., New York, New York 10055
School of Management, Yale University, New Haven, Connecticut 06511
Hartford Investment Management, Hartford, Connecticut 06105
mulvey{at}princeton.edu
ksimsek{at}sabanciuniv.edu
zhuojuan.zhang{at}blackrock.com
frank.fabozzi{at}yale.edu
bill.pauling{at}himco.com

The defined-benefit pension system poses substantial, long-term risks for the U.S. economy. We describe a flexible asset-liability management (ALM) system for pension planning. The primary goals are to improve the performance and survivability of the pension trust. We first employ a stochastic program for enhancing investment strategies in light of company and other goals and pension risk constraints. The results are linked with a policy simulator for further analysis. We illustrate the concepts via two disparate real-world companies. The first is a slowly growing auto company, and the second a profitable pharmaceutical enterprise. We show that a stochastic program can help in the process of discovering sound policy rules. The ALM system has been employed extensively throughout the world by a large global actuarial firm.

Subject classifications: finance; corporate; portfolio; programming; stochastic; simulation; applications; decision analysis; multiple criteria; risk.
History: Received May 2004; revision received August 2007; accepted August 2007.