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Liability Glide Path

In the CFAI text, it says that the objective of the liability glide path is to increase the funded status by reducing surplus risk over time.

Can someone explain why reducing surplus risk would increase the funded status? does the reduction in surplus risk refer to the allotment of assets toward the hedging portfolio?

Thanks a lot!

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I also have this question.  If the liability glide path is particularly useful for underfunded plans, how would you go about reducing surplus risk?  There is no surplus in an underfunded plan, correct?  

Is the increase in funding status and the decrease in surplus risk simply the result of increased contributions?

Are contributions essentially required until the funded status is improved and the hedging portfolio is fully funded?  

oceanwave1000 wrote:

In the CFAI text, it says that the objective of the liability glide path is to increase the funded status by reducing surplus risk over time.

Can someone explain why reducing surplus risk would increase the funded status? does the reduction in surplus risk refer to the allotment of assets toward the hedging portfolio?

Thanks a lot!

That’s what I assumed they meant and what makes sense to me - hopefully someone else can chime in who knows a bit more

schneid wrote:

oceanwave1000 wrote:

In the CFAI text, it says that the objective of the liability glide path is to increase the funded status by reducing surplus risk over time.

Can someone explain why reducing surplus risk would increase the funded status? does the reduction in surplus risk refer to the allotment of assets toward the hedging portfolio?

Thanks a lot!

That’s what I assumed they meant and what makes sense to me - hopefully someone else can chime in who knows a bit more

Hello I have found a good explanation about these concept that I think will help:

 The glide path blueprints de-risk as funded status increases by re-allocating funds out of the growth assets and into the liability hedge. In normal market environments, such a shift will reduce plan surplus risk but also reduce expected returns so contributions will be more likely to occur.

M.V. of Assets > P.V. of Liabilities = Surplus

Glide Path Dep states that you move away from higher risk asset toward more safer investments such as bonds in order to reduce the risk of surplus volatility or Standard deviation of surplus. By doing so, you match up assets w/ the liabilities and thus lowering the risk of surplus contracting if and when stocks pull back.

Is the liability glide path essentially the same idea as “De-risking” in the Real World Constraints asset allocation reading?