Investment decisions take into account the nature of the liabilities of the social security institution. In particular, investment strategy reflects the level, timing and nature of liability cash flows and the predictability of such future payment obligations.

As part of this analysis, appropriate modelling can be conducted to determine an investment strategy that is likely to meet the social security institution’s mission and goals. The assets of the social security institution should be modelled in conjunction with its liabilities, or an appropriate proxy of its liabilities. The use of asset liability modelling may, therefore, form an important part of the management and governance process of the institution.

Any modelling should ensure that, e.g. any inflation linking in the cash flow profile is appropriately accounted for, i.e. when a scenario projects a higher level of inflation, this is applied to both real assets and real cash flows so that the expected risk and return from holding nominal assets can be correctly calculated. Similarly, the timing of cash flows will change the risk profile of the scheme and the matching assets which are then appropriate as an investment.

This guideline should be read in conjunction with the ISSA-ILO Guidelines on Actuarial Work for Social Security, in particular Section A and Section C.