- Funded status volatility figures reflect an annual one-standard deviation change in funded status expressed as a percentage of the liability value, and are based on common simplifying assumptions, including normal distributions, zero expected surplus return, etc.
- Funded status volatility figures are based on historical monthly data from 01/31/2000 through 11/30/2012, unless otherwise noted. Funded status volatility is based on investment risk and an annual longevity risk assumption of 0.4% of the liability value. These risks are assumed to be uncorrelated.
- An illustrative liability with a duration of 11 years is used. Liability measures using a corporate rate are based on the Citigroup Pension Discount Curve.
- Equity allocations are based on the S&P 500 Index.
- Corporate bond allocations and custom fixed income blends are based on relevant combinations of Barclays Intermediate and Long Corporate and Treasury indices.
- We assume the illustrative plan is 80% funded based on the Citigroup Pension Discount Curve and assume no additional contributions. Asset allocations in the hibernation range assume interest rate derivatives are available to hedge a portion of the liability.
- “Risk assets” generally refers to assets held with the primary goal of seeking excess returns. Other assets, including assets held with the primary goal of liability hedging, may not be risk-free.
- NISA’s PSRX (typical plan volatilities and funded status levels)
- Barclays index data
- Bloomberg (S&P data)
- Observed volatility can vary substantially depending on the time period examined. While this conclusion will surprise no one, it reinforces the point that the ranges defined by the de-risking spectrum are estimates and may not be consistent over time.
- Nonetheless, the volatility of hibernation strategies is considerably more stable than the volatility of return seeking strategies. In other words, the allocations within the hibernation mode also have less uncertainty surrounding their volatility estimate. This is a desirable characteristic for a plan fiduciary seeking a risk-reducing solution in the hibernation range since it implies more reliability in the targeted volatility level.