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Graduate-Level Modeling · Institutional Asset-Liability Management

Liability-Driven Investment (LDI) Glide Path & Strategic Asset Allocation Optimizer

A pension plan doesn't need one optimal portfolio. It needs a rule that mechanically de-risks as funded status earns the right to, before anyone has to argue about it in a committee meeting.

How To Use This Model

Reading This Tool

Set return, volatility and duration assumptions for four underlying asset classes, blend them into a growth bucket and a liability-hedging bucket, and design a de-risking glide path that shifts the split as funded status improves.

This is exactly how a real pension or insurance ALM team designs strategic asset allocation, not a single static portfolio, but a rule that mechanically reduces risk as the plan's own funded status earns the right to take less of it.

Growth Bucket Assets

Equity Expected Return 8.0%

Equity Volatility 17%

Alternatives Expected Return 6.0%

Alternatives Volatility 12%

Equity-Alternatives Correlation 0.50

Growth Bucket Equity Weight 70%

LDI (Liability-Hedging) Bucket Assets

Government Bond Expected Return 3.5%

Government Bond Volatility 11%

Government Bond Duration 15.0

Corporate Bond Expected Return 4.2%

Corporate Bond Volatility 9%

Corporate Bond Duration 12.0

Government-Corporate Correlation 0.85

LDI Bucket Government Weight 40%

Growth-LDI Bucket Correlation 0.15

Glide Path Design

De-Risking Start (Funded Status) 80%

Fully De-Risked At (Funded Status) 110%

Growth Allocation Before De-Risking Starts 70%

Growth Allocation Once Fully De-Risked 20%

Plan Position

Current Plan Assets $400M

Liability Value $440M

Liability Duration 14.0

Current Glide Path Position

Funded Status

Current Growth Allocation

Blended Expected Return

Blended Volatility

The Glide Path: Growth Allocation vs. Funded Status

Institutional Asset-Liability Management

The Core Formulas

Bucket Return = w₁R₁ + w₂R₂, Bucket Vol = √(w₁²σ₁² + w₂²σ₂² + 2w₁w₂ρσ₁σ₂)
Glide Path: Growth% = linear interpolation between (Funded Status_start, Growth%_start) and (Funded Status_end, Growth%_end)
Effective Asset Duration = (1−Growth%)·LDI Bucket Duration
Funded Status Sensitivity (100bp) ≈ Funded Status × (Liability Duration − Effective Asset Duration) × 0.01

When To Actually Use This Model

Teaching liability-driven investing and dynamic de-risking glide path design in a pension finance or asset-liability management course.
Structuring a board-level asset allocation policy that automatically responds to funded status rather than requiring a discretionary re-approval every time markets move.
Illustrating the risk-return trade-off between growth-seeking and liability-hedging assets at a strategic, bucket level before diving into individual manager selection.

Key Assumptions & Limitations

Growth assets are assumed to carry no meaningful interest rate duration, a simplification, equities and alternatives do have some rate sensitivity in practice, just far less than long bonds.
The glide path here is a simple linear interpolation between two funded status points, real glide paths often use more granular funded-status bands with additional triggers (e.g., market volatility circuit breakers).
This tool models two broad buckets built from four assets, a full institutional strategic asset allocation typically spans many more asset classes with a complete, empirically estimated covariance matrix.

Foundational References

Leibowitz, M. L., & Henriksson, R. D. (1988). Portfolio Optimization With Shortfall Constraints. Financial Analysts Journal, 45(2), 34-41.

Society of Actuaries and various consulting frameworks on dynamic de-risking glide path design for defined benefit pension plans.

Want to stress-test the funded status this glide path is reacting to?

Open The Pension Stress-Test Simulator →