Defining the de-risking glide path for defined benefit pension plans
The Pension Protection Act of 2006 (PPA) created conditions that were more receptive to a dynamic approach. Reviews of asset allocation, which previously might have been carried out on a three- or even five-year cycle, became annual events. Following its arrival on the corporate DB scene around 2008, the concept of liability-responsive asset allocation (LRAA) spread remarkably quickly. Although pension plans are often seen as conservative and slow to adopt new ideas, de-risking glide paths were widely embraced almost immediately.
In this Viewpoint we:
- Discuss the brief history of the LRAA strategy
- Rationale for the approach
- Outline 10 design considerations that are involved in the design of an LRAA schedule