DEFINITION of 'Dedication Strategy'

Dedication strategy is an asset management method by which the anticipated returns on an investment portfolio are matched with estimated future liabilities. A dedication strategy is frequently used in pension funds and insurance company portfolios to ensure that future liabilities can be met. Dedication strategy is also called portfolio dedication, cash flow matching and structured portfolio strategy.

BREAKING DOWN 'Dedication Strategy'

A dedication strategy involves cash flow matching so that investment earnings will provide funds for anticipated future capital outlays. Pension funds and insurance companies can fairly accurately forecast future liabilities, which tend to be substantial. Their portfolios typically include low-risk, fixed income securities, such as investment grade corporate bonds, government bonds and mortgage-backed securities, that allow for predictable income streams to match projected future obligations.

Pension funds and insurance companies must be conservative with their investments because they need the certainty (to the extent possible within their control) of generating enough income to meet its obligations to pension recipients and policy holders. At the individual level, too, an investment plan to "dedicate" a portion of assets to produce income to pay for particular known expenses — college tuition, wedding costs, retirement, as examples — is part of a wise money management strategy.

An Example of Dedication Strategy Language

The California Public Employees' Retirement System (CalPERS) is explicit in its use of the word "dedicated" to describe the purpose of one of its trust funds: "The California Employers' Benefit Trust (CERBT) Fund is a Section 115 trust fund dedicated to prefunding Other Post Employment Benefits (OPEB) for all eligible California public agencies ... By joining this trust fund, California public agencies can help finance future costs in large part from investment earnings provided by CalPERS." "Dedicated" implies that CalPERS is investing assets so that they will deliver income solely for the purpose of funding OPEB.

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  2. CalPERS

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  3. Liability Matching

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  5. Allocated Funding Instrument

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