18 May 2023 4 min read

Gentle glidepaths for foggy funding levels

By John Southall

Trustees, as the 'pilots' of DB schemes, need to plan how they're going to 'land' at buyout. One issue they may face is that they only know their buyout funding level approximately. In this blog I explain why trustees might opt for a gentler glidepath when facing foggy conditions.


An interesting aspect of DB glidepaths is that you can make a theoretical argument that de-risking should only occur when 100% funded. Such a crash landing to buyout may sound like heresy, but there is some logic behind the idea.

De-risking as funding levels rise is meant to be driven by the limited upside available to members: discretionary increases aside, they won’t receive more than 100% of the benefits promised. The scheme shouldn’t be taking unnecessary risk, so it feels natural to ease off the throttle as the upside potential reduces.

However, if the pilot knows the scheme is underfunded, she can always shorten her projection horizon so that the risk of overfunding over that horizon becomes negligible. With continuous monitoring and a de-risking trigger in place, she can ensure she’s only ever running growth risk that’s uncapped and rewarded. The perfectly informed pilot with a fantastic reaction time has no need for a gentle glidepath.

Behaviourally, this is tricky to digest, though. Crash landings also struggle for practical reasons: continuous monitoring and instantaneous de-risking are impossible.

Another important complication is that many schemes don’t know their buyout position. Their scheme actuary can make a rough estimate, or the trustees can request indicative quotes from insurers. Obtaining accurate pricing is a significant exercise and it may be challenging to get a quote in a busy market unless the insurer has confidence the transaction is likely to progress.

A cloud of uncertainty

To investigate, I set up a model*. The graph below shows the results and how the glidepath, represented by a return target, could be impacted. All four lines involve de-risking as the estimated funding position improves. By construction, this involves shifting from a gilts + 2.5% p.a. ‘growth’ target to a gilts + 0.5% p.a. ‘buyout aware’ target. However, different glidepaths arise depending on how quickly the trustees can react and how certain they are about the buyout position:


To explain:

  • The difference between the solid and dashed lines relates to reaction speed. The solid lines assume the ability to de-risk within one year should full funding be reached. This could be achieved either by buying out, buying in, or switching to an investment strategy that is focused on buyout pricing[1]. The dotted lines assume they could do it faster – within three months
  • The difference between the red and blue lines relates to uncertainty as to the ‘true’ buyout funding position. The red lines assume no uncertainty whereas the blue lines assume there’s about a two-thirds chance of being within 5% of the estimate

Comparing the dashed and solid red lines, the faster the reaction, the higher the red line to the left of full funding. Indeed, in the limit we’d achieve the theoretical situation described earlier where there is a step change in return target at 100%.

However, what’s interesting is that the speed of de-risking response (three months or one year) is unimportant relative to the uncertainty in the buyout funding position. The blue lines are very similar to each other and involve a much gentler glidepath – a gradual shift in return target as the estimated buyout funding level improves. The pilot should opt for a gradual glidepath under foggy conditions, no matter how snappy her reaction time.

Vision has value

The above raises an interesting question: how bad is it that the scheme is invested differently to if the pilot had better knowledge (i.e. they knew the buyout funding level)? Based on the same model, I worked out the reduction in the ‘certainty equivalent’ funding position due to the uncertainty. This is how much the fog costs:


These are not huge numbers (fortunately), but nor are they insignificant, particularly for schemes estimated to be close to 100% funded. 

Some schemes may consider the possibility of a ‘price lock’ or ‘asset lock’ of some sort with an insurer. This can clear the fog. There is typically a cost for doing so but, as you can see above, it could potentially be worth it depending on the specifics.

To wrap up, the potential upshots are:

  • Well-funded schemes should take steps to get a more accurate assessment of their funding position as this may allow them to tailor their investment strategy more appropriately.
  • With an accurate assessment it can make sense to keep risk on for longer and then quickly de-risk. But in the absence of such certainty a more gradual de-risk is likely to be appropriate.
  • Schemes may also wish to consider a price or asset lock of sorts when close to landing, to ensure a ‘perfect’ touchdown


*Key model assumptions

The calculations assume the trustees’ appetite for risk means that there would be a gilts + 2.5% pa return target in the absence of limited upside benefits for members, and that a buyout-aware strategy achieves gilts + 0.5% pa with minimal risk relative to buyout pricing

Consistent with this, to calculate the utility of a scenario, funding levels are capped at 100% and then a power utility function applied with a risk aversion parameter of 6.9

Returns in excess of that of a buyout aware strategy can be generated with a Sharpe ratio of 0.4

Funding level returns are lognormally distributed


[1] This will not track buyout prices perfectly, however

John Southall

Head of Solutions Research

John works on financial modelling, investment strategy development and thought leadership. He also gets involved in bespoke strategy work. John used to work as a pensions consultant before joining LGIM in 2011. He has a PhD in dynamical systems and is a qualified actuary.

John Southall