CIPFA Pensions Panel: Weighing Up Risk Against Reward - An Introductory Guide to Asset-Liability Studies for Local Government Pension Funds (Issue No. 9 August 2007)

One of the most important, and most difficult, decisions those charged with the operation of a Local Government Pension Scheme face is how best to allocate fund assets to meet the needs of their scheme. Faced with a plethora of potential strategies, products and plans, what information is available to decision-makers to help them make the right decisions for their fund?

An asset-liability modelling (ALM) study can prove to be a valuable tool in helping in the decision-making process. An ALM study aims to model how the assets and liabilities of a fund might behave under a range of different economic scenarios to simulate a range of possible outcomes. These can subsequently be used to inform an investment strategy review.

This introductory guide, prepared by the CIPFA Pensions Panel in association with Hymans Robertson, aims to set out for those considering embarking on an ALM study:

• the link between assets and liabilities
• how an ALM study fits into the investment strategy review process
• what an ALM study is (and isn’t)
• the importance of being clear on the objectives of the study and understanding the model
• how to interpret and use the results of a study
• key questions to ask when commissioning an ALM study.

The guidance is aimed at all those involved in local government pension scheme management including:

• section 151 officers
• members of pensions committees in local authorities
• local authority pension fund managers
• pension fund advisors.