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In Search of Funded Status Stability

In today’s environment, where public equity valuations remain elevated while high-quality fixed income offers compelling starting yields, we believe it’s an important moment to revisit how portfolios are positioned to manage funded status risk. We believe there is an opportunity to improve funded status stability within the existing Estimated Return on Assets ("EROA") construct for Public Pension Plans.
In Search of Funded Status Stability
Headshot of Aaron Smith
Headshot of Rene Martel
Headshot of Michael Chandra
, , 
 | {read_time} min read

A few key takeaways:

  • Public pension liabilities can be highly sensitive to changes in assumed returns - even small shifts can drive meaningful changes in liability values
  • When EROA evolves gradually, it can create unintended disconnects between asset behavior and liability, potentially contributing to funded status volatility
  • Allowing fixed income assumptions to evolve with yields can improve alignment between assets and liabilities may help reduce surplus risk

With yields at attractive levels, fixed income potentially can play a more powerful dual role today: a source of return and a stabilizer of funded status.

Download the full paper to explore the findings and implications in greater detail.

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