A method of setting pension plan investment policy, overlay derivative strategy and other pension policies, initiated by the calculation of a ratio for any existing, putative or alternative asset portfolio of a pension fund with specific reference to the pension plan's liabilities. The method's calculated ratio X/Y, referred to as the “pension fund liability allocation” or “pension liability allocation” for any portfolio under consideration indicates that X % of pension liabilities are hedged by an equal dollar amount of pension assets and Y % of pension liabilities are unhedged by the remaining pension plan assets. The ratio X/Y may also be used to assess and compare risk between pension plans of different entities. The pension liability allocation is a concise metric indicating the pension fund's degree of asset/liability mismatch risk.