Set out the main methods for allocating assets relative to liabilities

Surplus optimisation applies mean–variance analysis to surplus returns, maximising E(surplus return) − 0.005 × λ × σ²(surplus) and so accounting for the correlation between assets and liabilities. The hedging/return-seeking approach splits assets into a portfolio matched to the liabilities, often with duration-matched bonds or interest rate swaps, and a separate portfolio seeking growth; variants include partial hedging and conditional strategies that raise the hedge as funded status improves. The integrated asset–liability approach optimises assets and liabilities jointly, as banks and insurers can do when they control both sides. Surplus optimisation is flexible but inherits MVO's weaknesses; the two-portfolio approach is simple to explain. The trap is applying a full hedge when the plan is underfunded and needs growth.