1. ¹is Professor of Operations Research and Financial Engineering and founding member of the Bendheim Center for Finance at Princeton University. He has implemented financial planning systems for many large organisations, including Towers Perrin and its Tillinghast subsidiary, Pacific Mutual, and American Express. He has been a faculty member at Princeton University since 1978.
2. ²received his PhD in Operations Research and Financial Engineering from Princeton University and, effective September 2006, is an assistant professor in the Faculty of Management at Sabanci University, Turkey. His main research interests involve the areas of asset-liability management and dynamic investment strategies. He was with the Edhec Business School, Nice, France, at the time of writing.
3. ³received her PhD in Operations Research and Financial Engineering from Princeton University and, effective July 2006, is an associate in the Financial Modeling Group at BlackRock Inc.

Correspondence: John M Mulvey, Bendheim Center for Finance, Princeton University, Dial Lodge, 26 Prospect Avenue, Princeton, NJ, 08540-5296, USA, E-mail: mulvey@princeton.edu

Revised 21 May 2006.

Abstract

Over the past half-decade, pension plans in the US have seen their ample surpluses turn into massive deficits. Many pension trusts in early 2006 possess funding ratios below 75 per cent. This paper suggests that multi-period investment models can increase performance for long-term investors including pension plans, family offices and university endowments. The framework improves the investor's understanding of risks and rewards in a temporal setting. Contribution and saving strategies can be integrated with asset allocation decisions to enhance the sponsoring company's shareholder value via the pension trust. Applying an overlay strategy further improves performance. Advantages are illustrated via several examples, including the slow-growing telecommunication sector and the under-funded pension plan of a car company.