The Global Risks Alliance (GRA)
An institutional fund holds assets to pay liabilities, and the two respond to different forces. Interest rates and inflation change the present value of promised benefits; markets change the value of assets. Asset liability management is the discipline of deciding how much of that mismatch to keep. This page sets out how mismatch arises, how hedging programmes and their collateral needs create new exposures, and what the evidence serves for the trustees and supervisors who set and review the strategy.
GRA · Established · service level R0
Asset-liability management is the joint management of a fund's assets and liabilities, which respond to different forces: interest rates and inflation change the present value of benefits, markets change asset values. Hedging reduces surplus risk and creates demand for collateral, as the stress in liability-driven investment showed.
For asset liability management, in GRA's spatial-finance reading, the map opens on night lights and population density with built-up and settlement extent from NASA GIBS, framed on Oceania and the Pacific; every other NASA layer, live feed and forecast waits in the layer list.
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For asset liability management, in GRA's spatial-finance reading, the map opens on night lights and population density with built-up and settlement extent from NASA GIBS, framed on Oceania and the Pacific; every other NASA layer, live feed and forecast waits in the layer list.Satellite and model products as NASA publishes them, each with its own date; indicators, not assessments of any place; claim ceiling INTEGRATED.
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Investment and liability dependencies. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.
Liabilities are valued by discounting future benefit payments. When long-term rates fall, liabilities rise, often by more than the assets held against them, so an unhedged fund can lose funding even in a rising market.
Indexed benefits rise with prices or wages, while nominal bonds and many real assets respond differently. The degree of indexation, its caps and floors, and the instruments available determine how much inflation risk can be hedged.
Interest rate and inflation swaps, repo and leveraged gilt or bond funds hedge liabilities with little capital, but a sharp rise in yields triggers collateral calls that must be met in days. A hedge that cannot be supported is closed at the worst moment.
Equities, credit and private assets are held for return above the liability. Their volatility relative to the liability, not their stand-alone volatility, is the surplus risk the board accepts, and it depends on the sponsor's capacity to absorb shortfalls.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Hedge ratio | The share of liabilities' interest rate or inflation sensitivity matched by assets. |
| Duration gap | The difference between the interest rate sensitivity of assets and of liabilities. |
| Collateral headroom | Liquid assets available to meet margin calls on derivatives before forced sales. |
Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Interest rate hedge ratio | percent of liability rate sensitivity | monthly | Fund and hedging manager reports | REPORTED |
| Inflation hedge ratio | percent of liability inflation sensitivity | monthly | Fund and hedging manager reports | REPORTED |
| Duration gap between assets and liabilities | years | quarterly | Asset liability model | MODELLED |
| Surplus value at risk | percent of liabilities at a stated confidence and horizon | quarterly | Asset liability model | MODELLED |
| Collateral headroom | basis points of yield rise absorbed before recapitalisation | weekly | Hedging manager and pooled fund reports | REPORTED |
| Projected benefit cash flows | currency per year by future year | at each valuation | Actuarial cash flow projection | MODELLED |
| Liability discount rate | percent per year | at each valuation | Actuarial valuation or accounting disclosure | DECLARED |
The topic as a computational graph: named sources feed the methods, an evidence review gates the outputs, and the decisions stay with the authorities that hold them.
Fig. 02Nodes carry their type, two metric rows and a state; connectors show what feeds what; dashed frames name the owners; the timeline is the cadence. Design of the pipeline, not a record of a run.
Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.
| Source | What it gives | Licence class |
|---|---|---|
| EIOPA IORP stress test reports | Sensitivity of occupational pension balance sheets to rate, market and inflation shocks | Free reuse, attribution |
| Bank of England Financial Stability Reports and Financial Policy Committee records | Analysis of liability-driven investment, collateral calls and the resilience standards that followed | Free to read, Bank of England terms |
| The Pensions Regulator guidance on liability-driven investment | Expectations for leverage, collateral buffers and governance of hedging arrangements | Open Government Licence |
| Federal Reserve Financial Accounts of the United States | Sector balance sheets of private and public pension funds, including claims on sponsors | Public domain |
| ECB pension fund statistics | Euro area pension fund assets and liabilities by instrument | Free reuse, attribution |
| De Nederlandsche Bank pension fund statistics | Balance sheets, hedge ratios and funding of Dutch pension funds | Free reuse, attribution |
| Pension fund annual reports | Disclosed liability valuations, discount rates, hedge policies and asset allocation | Public records, terms per fund |
Institutional Funds Nexus prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.
| Who decides | The question | Evidence this page serves |
|---|---|---|
| Trustees and investment committees | What hedge ratios, leverage and collateral buffers the fund should hold | Liability sensitivities, collateral headroom under stated yield shocks and the cost of each hedge level |
| Sponsoring employers | How much surplus risk the sponsor is prepared to underwrite | Surplus distributions under scenarios against the sponsor's capacity to pay |
| Boards of pooled hedging funds and their managers | What buffer to hold and how to recapitalise investors in a fast market | Buffer adequacy against historical and hypothetical yield moves; investor response times |
| Pension regulators and central banks | What minimum resilience to require of leveraged hedging arrangements | System-wide collateral demand under stress and the market depth available to meet it |
The questions concern the gap between assets and liabilities.
Liabilities behave like long-dated bonds: their value rises when interest rates fall. A fund holding growth assets that do not move with rates faces mismatch risk. Hedging with bonds or derivatives reduces that mismatch but can introduce leverage and collateral requirements, and limits the return potential of the portfolio.
Inflation-linked benefits add sensitivity to inflation. Longevity changes alter the duration and size of liabilities and are hard to hedge with market instruments. The result is a set of interacting dependencies, where decisions about hedging, liquidity, return-seeking and contributions cannot be made in isolation.
| Method or data | What it shows | Limits |
|---|---|---|
| Duration and sensitivity analysis | How liabilities and assets respond to rate and inflation changes | Linear measures miss large-move behaviour |
| Stochastic asset-liability modelling | Distributions of funding outcomes | Depends on assumed return and correlation models |
| Liquidity stress testing | Cash needs under market stress | Extreme moves may exceed tested ranges |
| Scenario analysis | Outcomes under specified economic paths | Scenarios are not forecasts |
The current service level is R0: information and enquiries. An enquiry receives a reference and names the next step; applications, payments, compute allocations and registrations open only when their team, terms and review capacity exist.