In today’s economic environment, defined benefit (DB) pension plans that are focused on liability-driven investing continue to face challenges in managing their portfolios.

The funded status of DB corporate plans has been largely range-bound and below pre–global financial crisis averages. As the Fed continues monetary tightening and reduction of its $4.5+ trillion (€3.7+ trillion) balance sheet, plan sponsors who declined to de-risk at higher interest rate levels are hesitant to do so now. Against this backdrop, many investors are trying to enhance returns without taking on additional funded status volatility and the corresponding risk of unexpected downside contributions.

Traditionally, pensions have utilized long-duration fixed income to reduce funded status volatility, but heavily-concentrated bond portfolios may also dilute expected returns. Increasing public equities, on the other hand, can boost expected returns, but also increases funded status volatility.