One of the biggest strategic decisions faced by defined benefit (DB) pension plans is that of choosing an interest rate hedge ratio. In this article, we describe a broad diagnostic that helps to identify some of the key pressure points. It’s a high-level tool that provides a general assessment rather than a definitive answer. The diagnostic sets the stage by highlighting what are likely to be the most important considerations given a particular plan’s situation. 

The diagnostic is based on four key areas of consideration:
1. Risk tolerance
2. Funding and accruals
3. Current commitment to liability-driven investment (LDI)
4. Expectations regarding future interest rate movements
 

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