“GPS: Glide Path Strategies to Reach Funding Goals” examines how the framework combines aspects of two traditional pension investment approaches—growth-oriented and liability-driven investing (LDI). The paper also offers a road map for improving and stabilizing funded status over time, while striving to minimize contributions.
Specific characteristics of the framework presented in the paper are based on J.P. Morgan’s research and experience working with corporate pension plans, and includes:
• An optimized, dynamic asset allocation approach, in line with plan sponsor characteristics, time frames, risk budgets and investment polices;
• A series of glide path portfolios defined by allocations to two broad categories of assets: “growth assets” and “liability-hedging assets” including, where appropriate, a derivatives overlay;
• A multi-dimensional “trigger” that drives the progression from one portfolio to the next. The model imposes, in line with plan-specific considerations, an increasing emphasis on liability-hedging (versus growth) assets as the plan approaches its investments horizon and target funded ratio;
• A contributions schedule that is part of the solution (versus simply an input to it). This approach is designed to minimize aggregate contributions and constrain the dollar amount of contributions to be static or declining as funded ratios improve, while taking Pension Protection Act (PPA) funding requirements into account;
• Well-diversified, actively managed growth and liability-hedging portfolios, the asset composition of which can change as the emphasis shifts over time from growth to liability hedging; and
• A diagnostic tool for working with plan sponsors to assess trade-offs that may be required to reach funding goals and to stress test results under alternative scenarios.