Assess the features of liabilities that matter for asset allocation

Liabilities differ along several dimensions that decide which assets can hedge them. Are they fixed in amount and timing, or contingent on events such as mortality, claims or a benefit formula? Are they legal obligations or quasi-liabilities, such as an endowment's spending target? How sensitive are they to interest rates (duration and convexity), inflation and wages, and are they linked to economic growth or equity markets? A defined benefit plan with salary-linked benefits for active members has liabilities tied to wage inflation, while retirees' fixed benefits look like nominal bonds. Uncertain liabilities may need to be modelled with scenarios. The trap is hedging with nominal bonds alone when liabilities are inflation-linked, or treating contingent liabilities as fixed cash flows.