Navigating surplus: U-Shaped Glidepath Strategy and Uses of Pension Overfunding 

Brief synopsis:

Defined benefit (DB) pension plans have recorded a significant rise in their funded status due to strong equity markets and higher interest rates. Many plans are now overfunded, suggesting a need to reassess investment strategies and the potential uses of surplus assets. This paper explores the efficacy of a U-shape glide path compared to a more traditional approach. We study the issue primarily through the use of forward-looking Monte Carlo simulations. This paper also highlights potential uses of plan surplus that can be beneficial to both plan sponsors and plan fiduciaries. 

Key findings:

• For a defined benefit plan with a moderate level of surplus, we find that a U-shape glidepath may perform better  than a traditional glidepath. After attaining a level in excess of fully funded, the U-shape increases the allocation to return-seeking assets, whereas the traditional glidepath keeps the allocation static. Outperformance is measured by examining the distribution of outcomes and observing the generation of additional dollars of surplus, while still protecting the plan from experiencing a shortfall.
• Sponsors who are in a surplus position may want to reassess their glide path design.
• We document several uses of surplus assets while a plan is still being maintained, i.e. an overfunded plan does not necessarily need to be terminated. 

Questions addressed:

• How might the glide path of a plan that features a significant surplus be structured? 
• What are the potential uses of plan overfunding?