Investing surplus assets: A U-shape glide path 

To explore how plan sponsors can make the most of their surplus we determine the amount of liability-hedging assets needed to fully secure pension liabilities.  Once that figure is determined, the remaining surplus can be strategically invested for growth.

For example, assume a frozen 110% funded plan. We can establish a floor with only ~90% invested in liability-hedging assets. The remaining ~10% of assets can be invested for upside growth.

Fixing the liability-hedging assets to a dollar amount naturally creates a U-shaped glide path when we convert those amounts back to percentages. See Exhibit 1 for an illustration. 

While using surplus assets for growth is a reasonable strategy, a plan sponsor should also safeguard against dipping below the minimum funding floor (e.g. 110%). If funding levels were to approach this threshold, it would be important to rebalance back toward more liability-hedging assets so that benefits are protected.

Plan sponsors with a moderate surplus should arguably take a fresh look at their glide path strategy to ensure their asset allocation aligns with their long-term goals. They may want to consider a U-shape glide path to potentially enhance the performance of their plan’s assets. They can then choose, if so inclined, to use their increased surplus in a variety of ways.

For a deeper dive into the U-shaped glide path, including case studies of overfunded plans, read our research paper titled Navigating Surplus: A U-Shaped Glidepath and Uses of Pension Overfunding. This guide also explores additional ways to use surplus assets. 

Are you ready to explore how your pension surplus can create greater value for your organization and employees? Contact us to discuss tailored strategies that align with your long-term goals.