Reflecting Plan Sponsor Risk Tolerance in Glide Path Design | Capital Group

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Investment Insights

November 2016

Reflecting Plan Sponsor Risk Tolerance in Glide Path Design

Synchronize your risk tolerance and LDI glide path
  • What is the optimal way for a defined benefit plan to de-risk? This is one of the most challenging questions faced by plan sponsors.
  • To answer appropriately, a sponsor must first consider their risk tolerance and the objective factors influencing it — including the plan’s relative size, whether it’s open or closed, and business cyclicality.
  • We have developed a quantitative framework to help map risk tolerance onto a choice of glide path. At the heart of our analysis is a dynamic glide path-equivalent of standard mean-variance optimization, a mathematical approach that solves for glide paths rather than static allocations.
  • Through this framework, we are able to construct what is, in effect, liability-driven investing (LDI) efficient frontier. The LDI efficient frontier helps plan sponsors to probe the potential impact of different decisions, and understand the precise tradeoffs that they’re making when deciding on a glide path.  

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