Pension plan glidepaths have been successful in the past decade. Many plan sponsors, given the equity bull market, have seen their pension plan's funded status improve and have crossed at least one trigger during that time.
But as experience with these glidepaths has increased, there is more recognition of areas of concern. The first concern is that, while hitting a trigger lowers portfolio risk by moving assets from growth to hedging, it doesn't help to protect the amount of assets still in the growth portfolio from a market downturn. Second, at the later stages of many glidepaths (higher funded status levels), there is too little growth allocation to allow a plan to reach a higher funded status in a relatively short period of time without additional cash contributions from the plan sponsor.
The challenge is how to address both of these issues; how can we better control downside risk as well as maintain a greater allocation to the growth portfolio throughout the glidepath in order to reduce expected contributions and reach the goal in a desired time period?
Both of these issues can be addressed through the use of risk management tools such as equity index put and call options. These tools can be added to a portfolio to manage equity risk in a cost effective and customized way, while also allowing the interest rate hedging portfolio to increase.