What is a liability glide path, and how do pension funds use it to de-risk their portfolios as funded status improves?

A liability glide path is a pre-defined framework that systematically shifts a pension fund's asset allocation from return-seeking assets (equities, alternatives) toward liability-hedging assets (long-duration bonds, LDI strategies) as the funded ratio improves. The goal is to lock in funding gains and reduce the risk of falling back into underfunded status.\n\nWhy Glide Paths Exist:\n\nA pension fund's primary risk is not portfolio volatility per se, but surplus volatility -- the risk that assets fail to keep pace with liabilities. As the funded ratio rises, the marginal benefit of additional return-seeking assets (which might push funding above 100%) diminishes relative to the risk of a drawdown that could reverse hard-won funding gains.\n\n`mermaid\ngraph LR\n A[\"Funded Ratio 70%
Heavy growth allocation
80% equity / 20% bonds\"] --> B[\"Funded Ratio 85%
Moderate growth
60% equity / 40% bonds\"]\n B --> C[\"Funded Ratio 95%
Transition zone
40% equity / 60% bonds\"]\n C --> D[\"Funded Ratio 105%
Near-immunized
20% equity / 80% bonds\"]\n D --> E[\"Funded Ratio 110%+
Fully hedged
5% equity / 95% LDI\"]\n style A fill:#ff6b6b\n style C fill:#ffd93d\n style E fill:#4ecdc4\n`\n\nWorked Example:\n\nPinehurst Manufacturing Pension has $1.2 billion in assets and $1.33 billion in liabilities (funded ratio: 90.2%). The board adopts this glide path:\n\n| Funded Ratio Trigger | Equity Allocation | LDI/Bonds | Hedge Ratio |\n|---|---|---|---|\n| < 80% | 75% | 25% | 25% |\n| 80-90% | 60% | 40% | 40% |\n| 90-95% | 45% | 55% | 55% |\n| 95-100% | 30% | 70% | 70% |\n| 100-105% | 15% | 85% | 85% |\n| > 105% | 5% | 95% | 95% |\n\nAt 90.2%, Pinehurst is in the 90-95% band: 45% equity / 55% LDI.\n\nA strong equity quarter pushes assets to $1.31 billion. Funded ratio: $1.31B / $1.33B = 98.5%.\n\nGlide path trigger: Move to 95-100% band.\nNew allocation: 30% equity ($393M) / 70% LDI ($917M)\nTrade: Sell $197M equity, buy $197M long-duration bonds.\n\nImplementation Approaches:\n\n1. Rule-based (automatic): Pre-set triggers execute automatically when funded ratio crosses thresholds. Removes behavioral bias but may trade at disadvantageous times.\n\n2. Discretionary with guidelines: Investment committee reviews monthly and decides whether to follow the glide path or deviate based on market conditions.\n\n3. Continuous (smooth glide): Instead of discrete bands, the allocation shifts continuously as a function of funded ratio. Less cliff-effect risk.\n\nKey Design Decisions:\n\n- Speed of de-risking: Aggressive glide paths lock in gains quickly but may reduce return potential prematurely if liabilities grow\n- Ratchet vs. two-way: Some glide paths only move toward bonds (ratchet), never re-risking. Others allow re-risking if the funded ratio deteriorates.\n- LDI implementation: The bond allocation should match the liability's duration, key rate profile, and inflation sensitivity -- not just be generic bonds\n\nStudy LDI and glide path design in our CFA Level III course.