Dedicated bond portfolios allow a corporate pension fund to take advantage of favorable fixed income markets and of the actuarial system’s willingness to provide special benefits for a minimum-risk investment approach. Purely as an investment approach, a dedicated portfolio serves as a least-risk asset, minimizing the risks involved in fulfilling a large class of nominal-dollar liabilities. Because the process is largely assumption-free, it provides the sponsoring corporation with an actuarially acceptable way to take advantage of available market interest rates to improve funding status.
Cash-matching, the simplest form of dedication, produces a fixed income portfolio that provides a stream of payments from coupons, sinking funds and maturing principal payments that matches a given liability schedule. In many cases the objective will be to assure fulfillment even under totally passive management—that is, no reinvestment. Reinvestment at positive interest rates, however, can lower pension fund costs without substantially increasing risk or complexity. Active management of cash-matched portfolios, within the constraints of the portfolio’s conservative purpose, can be employed to take advantage of changes in the market structure.