The encyclopedia · Finance & Accounting · Financial decision · 1996–2000
Towers Perrin's asset-liability system saved US WEST $450M–$1B in pensions
CAP:Link scenarios plus OPT:Link optimization linked pension assets to liabilities, letting US WEST save $450M–$1B in opportunity costs.
Towers Perrin-Tillinghast
the move
Pension and insurance plans traditionally managed assets for return and treated liabilities as an actuarial afterthought. Towers Perrin-Tillinghast built a system that links the two.
The system combines three components: CAP:Link generates coherent stochastic scenarios of economic factors and asset returns over long horizons; OPT:Link uses nonlinear optimization and simulation to allocate assets; FIN:Link reports the results against liabilities and financial targets.
By 2000 the system was helping pension plan and insurance clients understand capital-market risks and opportunities in relation to their liabilities. Its most dramatic documented result: US WEST saved $450 million to $1,000 million in opportunity costs in its pension plan by following the advice.
why it works
- Scenario generation made future states coherent, not arbitrary.
- Optimizing assets against liabilities matched risk to the plan's promises.
- Clients could see trade-offs in dollars before committing.
- US WEST's $450M–$1B gain proved the approach, not just the theory.
what transfers
Don't optimize assets for return; optimize the fund against its liabilities — stochastic scenarios plus optimization let a pension plan see risk in dollars and act on it.
what came after
Towers Perrin's ALM approach was implemented for clients in 12 countries (as reported in the 1996 companion paper), and the system became part of the firm's standard pension and insurance consulting toolkit for linking assets to liabilities.
references
- An Asset and Liability Management System for Towers Perrin-Tillinghast
- An Asset and Liability Management System for Towers Perrin-Tillinghast
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