Combining System Dynamics and Asset-Liability Management in Pension Funds

System dynamics (SD) may amplify asset and liability management (ALM) methodology capability to be risk oriented. Therefore, this paper aims to apply SD principles to ALM models, in the specific case of pension funds. Conceptual issues assigned to ALM variables are described and a dynamic ALM approach, based on SD general principles and risk factors, is then examined. Risk must be defined in tangible operational terms. Pension funds need to produce a high-income return to correspond to actuarial expectations and to pay different kind of benefits. Its underlying assets non-financial nature and long-term liabilities dictate the nature of risk management. In a changing and complex environment, pension funds wealth management need a more robust investment allocation approach, than the static mean-variance analysis. In this context, ALM may provide some advantages. Finally, since decisions under uncertainty become complex specially because of the low comprehension of system long term best interests as a whole, system dynamics methods may provide an holistic overview to the ALM analysis results. The combination may improve the managers ability to explicit tacit knowledge, understand complexity and design better operating policies enhancing, this way, the discussions and learning about businesses strategies.