Explain what can go wrong when a portfolio is managed against a set of liabilities

Several risks survive even a well-built liability-driven strategy. Model risk arises because liability values rest on assumptions: for a pension, the discount rate, salary growth, inflation and longevity. Structural or yield curve risk arises when non-parallel shifts hit assets and liabilities differently because their cash flows are spread differently in time. Spread risk appears when liabilities are discounted at a corporate bond curve but hedged with government bonds or swaps, so a change in credit spreads moves the two apart. There is also counterparty and collateral risk on swaps, liquidity risk from margin calls after sharp rate moves, and uncertainty in the timing or amount of liabilities. The trap is believing that matching duration removes all risk.