How does a pension glidepath for de-risking actually work in practice?

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AcadiFi · Accepted Answer

A glidepath is a pre-committed schedule that automatically reduces portfolio risk as the plan's funded status improves. It is **funded-status-triggered**, not calendar-triggered, which distinguishes it from target-date fund glidepaths. **Mechanics**: 1. Define trigger levels along funded-ratio axis, e.g., 80%, 85%, 90%, 95%, 100%, 105%. 2. At each trigger, specify target weights for return-seeking (equities, alternatives) vs. liability-hedging (long-duration bonds, Treasuries, credit). 3. When funded ratio crosses a trigger upward, shift allocation toward liability-hedging. 4. Typically one-way (don't re-risk on downward crossings) — avoids locking in losses. Example glidepath at a plan run by CFO Veronika Kaminski: | Funded Ratio | Return-Seeking | Liability-Hedging | |---|---|---| | <80% | 60% | 40% | | 80-85% | 55% | 45% | | 85-90% | 50% | 50% | | 90-95% | 40% | 60% | | 95-100% | 30% | 70% | | >100% | 20% | 80% | **Design choices that matter**: 1. **Measurement of funded ratio** — GAAP PBO? Solvency basis? ABO? Market-value liabilities (using high-quality bond curves)? Choice matters hugely in low-rate environments. 2. **Smoothing** — averaging funded ratio over 3-12 months to avoid whipsaw. 3. **Asymmetry** — typically one-way down; some plans allow symmetric re-risking with caution. 4. **Completion portfolio** — the liability-hedging bucket is structured to match PBO key-rate durations, not just aggregate duration. 5. **Alternative asset treatment** — private equity illiquidity complicates rapid glidepath moves. ```mermaid flowchart LR A[Funded
85 pct] --> B[Bonds
45 pct] C[Funded
95 pct] --> D[Bonds
70 pct] E[Funded
105 pct] --> F[Buyout
Consider] ``` **Endgame options** once funded: pension risk transfer to an insurer (buyout), lift-out of retirees, plan termination, or hibernation with ultra-low-risk portfolio. Glidepaths sometimes include an explicit 'done' trigger (e.g., 110%) that initiates buyout conversations.

How does a pension glidepath for de-risking actually work in practice?

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