How does a pension glide path work mechanically?

Question

AcadiFi · Accepted Answer

A glide path is a rules-based policy that changes strategic asset allocation as funded ratio hits predefined triggers. It typically has 5-8 stations from underfunded to fully funded. Example for Meridian Telecom Pension Trust: at 85% funded, run 40% LDI / 60% RS; at 90%, 50/50; at 95%, 60/40; at 100%, 70/30; at 105%, 80/20; at 110%, 90/10; at full buyout-ready (115%+), 100% LDI and consider pension risk transfer. Triggers can be 'up-only' (ratchet, no re-risking) or 'up-down' (bidirectional), and can be funded-status-based or funded-status-plus-market-based. Smoothing rules prevent whipsaw — a 3-month moving average of funded ratio avoids trading on one noisy day. Implementation requires daily or weekly funded-ratio monitoring; many plans use dedicated LDI overlay teams. The committee decides in advance the 'reversal rules' — if funded ratio drops from 95% to 91%, do we re-risk back? Most modern glide paths say no, preserving gains. Glide paths also integrate with pension risk transfer (PRT): at higher funded levels, a buy-in annuity (insurer holds liability risk but plan retains assets) followed by a buy-out (full transfer) becomes economically feasible. The glide path endpoint in recent years has shifted from 'fully hedge and hibernate' to 'execute PRT when practical' because insurance company pricing has become competitive.

How does a pension glide path work mechanically?

Master Part II with our FRM Course

Related Questions

Practice Questions