Liability Matching

DEFINITION of 'Liability Matching'

An increasingly popular investment strategy that attempts to time future assets sales and income streams to match against expected future expenses. The strategy has become widely embraced among pension fund managers, who attempt to minimize a portfolio's liquidation risk by ensuring asset sales, interest and dividend payments correspond with expected payments to pension recipients. This stands in contrast to simpler strategies that attempt to maximize return without regard to withdrawal timing.

BREAKING DOWN 'Liability Matching'

Liability matching is growing in popularity among sophisticated financial advisers and wealthy individual clients, who are using multiple growth and withdrawal scenarios to ensure that adequate cash will be available when needed. The use of the Monte Carlo method of analysis, which uses a computer program to average the results of thousands of possible scenarios, has grown in its popularity as a time saving tool used to simplify a liability matching strategy.

RELATED TERMS
  1. Dedication Strategy

    A method by which the anticipated returns on an investment portfolio ...
  2. Matching Strategy

    The acquisition of investments whose payouts will coincide with ...
  3. Actuarial Basis Of Accounting

    A method used in computing the periodic payments that a company ...
  4. Unfunded Pension Plan

    An employer managed retirement plan that uses the employer's ...
  5. Pensionable Service

    The period of service, expressed in a yearly figure, for which ...
  6. Pension Fund

    A fund established by an employer to facilitate and organize ...
Related Articles
  1. Managing Wealth

    Introduction To The Portfolio Dedicated Strategy

    Dedicated Investment Portfolio strategies have been used by institutional investors like pension funds and insurance companies for many years and have gained some popularity with individual investors ...
  2. Managing Wealth

    Figuring Out How To Cover Your Liability Bases

    Whenever we talk about the asset-liability approach to portfolio management (ALM), the concepts of immunization and cash flow matching come into play.
  3. Financial Advisor

    Pension Advances: What You Should Be Wary Of

    The terms some pension advance firms require can be costly. Here's how to be sure your clients aren't making bad decisions.
  4. Retirement

    How Pensions, Social Security Differ

    Both pensions and Social Security provide an income stream to retirees, but they differ widely on how they're structured and funded. Here's the lowdown.
  5. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  6. Financial Advisor

    How to Help Clients Navigate Pension Payments

    Financial advisors play a key role in helping clients make critical pension decisions. Here are some tips to help clients make the right choices.
  7. Managing Wealth

    Examples Of Asset/Liability Management

    In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple.
  8. Retirement

    What are Pension Funds?

    A pension fund is a company-sponsored fund that provides income for employees in retirement.
  9. Financial Advisor

    How to Advise Clients with Frozen Pensions

    Financial advisors are on the front line in advising clients impacted by a frozen pension. Here's what they need to consider.
  10. Retirement

    Beware Of Taking Out A Pension Advance Loan

    Avoid taking out an advance against your pension. Interest on these loans is high and you could end up taking a huge tax hit – and even lose your pension!
RELATED FAQS
  1. The company I am receiving my pension plan from has just filed bankruptcy. Could ...

  2. How does a pension income drawdown work?

    Understand what a pension income drawdown plan is, and learn the current rules governing pension income drawdown plans in ... Read Answer >>
  3. What can you do with your pension if you leave the employer and can you borrow money ...

    I am planning to leave my job that I have worked at for 8 plus years and I just received a notice about a pension that I ... Read Answer >>
  4. How do pay-as-you-go pension plans work?

    Learn what a pay-as-you-go pension plan is and how it is different from fully funded pension plans. Understand how public ... Read Answer >>
  5. Who bears the investment risk in 401(k) plans?

    Who actually bears the investment risk in a pension plan depends on the type of pension plan that is employed. In a broad ... Read Answer >>
  6. How are Pay As You Go pension plan benefits taxed?

    Discover how the IRS treats pay-as-you-go pension plan benefits that are received as income in retirement, both for Social ... Read Answer >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center