Author: Tom Cassara
September 2025
Corporate pension plans have spent years following traditional de-risking glidepaths: gradually trading equities for long-duration bonds as funded status improves. The logic is intuitive — take risk off the table as the plan matures — but in practice, a "set-and-forget" glidepath leaves gaps.
Two vulnerabilities stand out:
- Equity risk lingers until the portfolio is almost entirely in bonds; a sharp drawdown can erase years of progress.
- Interest-rate exposure is often only partially hedged, leaving funded status subject to yield moves.
With equity markets near all-time highs and long rates still well above the lows of recent years, now is an ideal moment for finance leaders to rethink how they manage the pension balance sheet.
A smarter path: Pair fixed income with equity derivatives
Instead of waiting for funded status triggers to push you along a glidepath, you can:
- Accelerate the shift into high-quality fixed income, locking in today's yields and improving liability hedging.
- Maintain equity participation with derivatives — for example, collars or put spreads — that cap unneeded upside and fund downside protection.
Most well-funded plans don't require every dollar of future equity appreciation, but they do need to preserve the gains already earned. Equity options let you exchange a slice of upside for meaningful downside protection.
The derivative overlay cushions drawdowns and allows higher bond weight without giving up all growth potential. Volatility of funded status materially decreases in most economic scenarios.
Remember the other side of the equity coin
While too much equity late in a glidepath is risky, too little equity too soon carries its own cost.
A plan that de-risks aggressively as soon as it crosses a trigger may:
- Lock in low returns if long-term yields subsequently decline.
- See its funded ratio stagnate, forcing larger contributions from corporate cash flows.
- Miss the compounding that a modest, risk-managed equity allocation can still deliver.
This risk is especially relevant in an environment where inflation-adjusted rates may trend lower over time. Cutting growth assets prematurely can leave a plan "safe but stuck," with little chance to reach surplus levels or absorb future shocks.
A bond-heavy allocation complemented by equity derivatives keeps a controlled source of return alive — without putting funded status at the mercy of a full equity allocation.
Why de-risking matters for CFOs
- Balance-sheet stability: Smoother surplus/deficit outcomes reduce earnings volatility and free up capital for core business needs.
- Governance clarity: Risk posture is explicit and easier to communicate to boards, auditors and rating agencies.
- Strategic timing: Today's market backdrop offers attractive entry points — equities are rich, and long yields remain supportive for hedging.
The bottom line
Markets have handed sponsors a window: strong equity valuations and still-appealing bond yields. Locking in progress with a bond-heavy allocation plus equity-derivative overlay can help CFOs secure their plans and protect corporate capital — without sacrificing prudent growth.
