“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.
In addition to defining glide path investing in general and presenting the J.P. Morgan framework, the paper also:
• Incorporates illustrative case studies, including potential responses if a plan should deviate from its established glide path;
• Addresses practical plan sponsor implementation concerns and common questions, such as: Is the use of a glide path likely to lead to better or more predictable outcomes? How should the underlying growth and liability-hedging portfolios be managed? How precisely should liabilities be hedged? At the end of the glide path, are government or corporate bonds more appropriate liability-hedging assets?; and
• Provides a technical description of J.P. Morgan’s underlying model and its specifications.
The conclusion based on the paper is that glide path investing requires an up-front commitment of time and resources on the part of plan sponsors, but the very process of putting a glide path solution in place can be instructive and save time and resources down the line.
Preparation and the resulting multi-period glide path solution can position the plan to act more decisively and effectively in a changing environment and allow corporate management to remain more focused on core business concerns as targeted funded status is attained and contributions are stabilized.
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