What is a liability glide path concerned with?

A liability glide path is a strategic framework used primarily in asset and liability management, particularly for pension plans and other long-term liabilities. It is fundamentally concerned with how the proportions of return-seeking assets (such as equities) and liability-hedging assets (such as bonds) are adjusted over time in relation to the funding status and risk profile of the liabilities.

As a liability glide path evolves, the allocation between these two types of assets typically changes as the liabilities become more imminent or as funding status improves or deteriorates. For example, as a plan approaches its target date (e.g., the date when pension benefit payouts will commence), there is often a shift towards a higher allocation in liability-hedging assets to mitigate risk associated with potential shortfalls in meeting those liabilities. This adjustment helps ensure that there are adequate funds available to fulfill future obligations, thus managing overall risk exposure.

By concentrating on this relationship and its adjustments over time, a liability glide path provides a systematic approach for managing the funding of liabilities in a way that aligns with the risk tolerance and objectives of the entity, typically in response to changing market conditions and life stages of the liabilities.