Defined-benefit (DB) pension plans are an endangered species; they are perceived as too risky and costly. But the emerging substitute, the defined contribution plan, has many shortcomings. The risk of DB plans can be controlled, first, by modeling the liability in terms of its market-factor exposures through surplus (asset minus liability) optimization. Then, sponsors may hold the minimum-risk position (a liability-defeasing portfolio) or they may move up on the efficient frontier—taking equity and other risks. The economic cost of a DB plan also needs to be managed, but it is a matter of managing the size of the pension promise; it is not an asset allocation problem.

Author Information

M. Barton Waring is chief investment officer for investment policy and strategy, emeritus, at Barclays Global Investors, San Francisco.

Laurence B. Siegel is director of research in the Investment Division of the Ford Foundation, New York City.

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