In a signal shift, the focus of pension risk management has moved away from Product (long bonds; swaps; futures) and toward Process. The fastest growth in the investment-based risk management world is in the adoption of dynamic investment policies, or “glidepaths.” In their simplest incarnation, dynamic investment policies reduce the level of pension risk as the plan’s funded status improves, by shifting investments out of return-seeking investments (public equities; alternatives) and into liability-matching investments (long-duration bonds; swaps; futures). This transition usually is structured to occur as funded status improves.
Glidepaths are generally structured so they can be approved at the committee level and implemented by staff and/or vendors. They can be understood as a reaction to the missed opportunity from the time of our 2008 survey, when most pension plans were in a surplus position. Survey respondents could have avoided much pain and expense by moving to liability-matching investments at that time, but even those who desired to do so frequently ran into obstacles in the form of committee education, consensus-building, and implementation. By anticipating these needs up front, developing a glidepath, gaining stakeholder approval, documenting the procedures, and instituting a monitoring mechanism, sponsors seek to overcome the obstacles that made de-risking cumbersome when it was most needed.