We assume hypothetical defined benefit pension plan that reflects the characteristics of the occupational pension in Korea and propose surplus optimization strategy using regime switching model in asset-liability matching framework. We use conditional surplus at risk as a risk measure and construct optimized portfolio that limits extreme tail risks in defined benefit pension plan. In addition, we identify risk and return of assets conditional on global macro-economic status using hidden Markov model. Dynamic portfolios are constructed in each regime and we show defined benefit pension portfolio using regime-switching model outperforms an unconditional static portfolio.

Keywords ALM, Conditional Surplus at Risk, hidden Markov model, Optimization, Portfolio
JEL Classification: E32, E37, G11