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PIMCO’s Glide Path: An Outcome‑Focused Design

​​Our glide path focuses on providing sufficient real retirement income for every participant, rather than maximizing nominal wealth for the average participant.

PIMCO believes target-date strategies should achieve a sufficient level of real retirement income for every participant rather than focus on the more prevalent goal today of maximizing nominal retirement wealth for the average participant. A real-income orientation provides several advantages and, importantly, while the difference between real income and nominal wealth may seem subtle, it can lead to big differences in the ultimate asset allocation. To deliver on the goal of providing real retirement income, we believe that an asset manager must consider the full distribution of possible outcomes rather than focus solely on the average.

We believe that the ideal glide path should be designed to achieve:

  • Real income: An attractive median real income

  • High certainty: A compact distribution of real incomes

  • Minimal shortfall risk: Few very low outcomes

We believe in a holistic view of retirement readiness and planning. Our target-date analysis expands beyond the narrow confines of the retirement account: We incorporate common non-retirement assets (such as housing) or retirement income sources (such as Social Security) into our assessment of glide path performance. We believe this allows for a more complete, more accurate characterization of a household’s retirement risks.

PIMCO’s glide path, reflecting our comprehensive asset-and-liability-based retirement framework, is built around three key components: 1) outcome-focused real return liability-driven investment (LDI), 2) return optimization through diversification and 3) total risk management.

The resulting glide path offers plan sponsors the potential to achieve attractive real income replacement rates; further improve the consistency of outcomes; and significantly reduce the chance of participants falling short of an acceptable income replacement level.

Outcome focus: Embracing LDI
It’s not about how much money you have to retire; it’s about how much you can afford in retirement.

We believe that target-date funds should be designed around a retiree’s “liability:” the income that he or she will need for living expenses throughout retirement. This liability consists of a steady income stream that is adjusted for increases in living expenses or inflation.

In a manner similar to the approach used by defined benefit plans, we developed (and quantified) the “typical” retiree’s liability, based on a deferred real annuity of 20 years, which then served as the basis for determining the optimal asset portfolio in PIMCO’s glide path. (To learn more, see “Using a Real Liability to Assess Retirement Readiness and Inform Investment Decisions.”)

Quantifying and tracking the retirement liability over time allows for a dynamic glide path that is designed to significantly reduce the income risk of retirement savings. As real interest rates rise (or fall), the amount of retirement income available for any given amount of assets increases (or decreases). Figure 1 provides an example of the amount needed to support $25,000 in real income annually throughout retirement, based on the average life expectancy of 20 years past retirement and depending on interest rates. The lower the real interest rate at the time of retirement, the more wealth is needed to support a given real income expectation. To increase outcome certainty for retirees, the asset allocation should be sensitive to changes in interest rates and provide more income when more is needed.

Not surprisingly, then, an income focus leads to long-duration securities in the asset portfolio for their liability-matching characteristics: They tend to increase in value precisely when retirement income is the most “expensive” (i.e., when rates are low as shown in Figure 1).

Figure 2 illustrates the duration, or sensitivity to interest rates, of the typical retirement income stream over the 15-year period leading up to retirement, compared with the duration of the PIMCO and the market average glide paths. The larger the duration differences between the liability and glide path, the larger the uncertainty around the outcome, i.e., how much income is available throughout retirement.

We believe that the most appropriate measure of risk for retirement income is not the volatility of wealth, but the volatility of obtainable retirement income: how much the account value changes relative to the cost of retirement liabilities. Figure 3 quantifies this risk (called “tracking error”) for both the PIMCO and market average glide paths at various participant ages. As shown, our approach is significantly more effective at tracking the liability – and thereby reducing income uncertainty and shortfall risk – than the market average glide path.

To further minimize shortfall risk, we enhanced this liability-optimized approach by setting parameters for our simulations with an asymmetric objective function that puts a higher weight on outcomes that significantly underperform and a lower weight on those that significantly outperform. This is described in detail in “Rethinking Retirement Risk,” by Niels Pedersen and Sean Klein.

Diversification: Optimizing returns
Our next step was to maximize return potential along the glide path while maintaining a focus on the tracking error of the allocation to retirement liabilities. As part of this process, we incorporate PIMCO’s long-term capital market assumptions to help guide portfolio risk and return expectations. (See Figure 10 in the Appendix for PIMCO glide path return assumptions.)

In general, we favor portfolio construction based on risk-factor diversification rather than asset-class diversification. PIMCO has found that during periods of market stress, seemingly different assets tend to be highly correlated. Simply diversifying across asset classes therefore often results in portfolios that may appear diversified but conceal concentrated risks. We have developed what we believe is a more efficient allocation approach that looks beyond asset-class labels and focuses instead on the common underlying risks that many assets share, such as equity beta, duration, currency, momentum, etc. Our approach aims to construct diversified long-term portfolios that can perform in various economic environments and are not overly influenced by our experiences of the recent past.

Figure 4 illustrates the benefits of our risk-factor diversification approach. In terms of value-at-risk (VaR), the PIMCO glide path shows lower risk than the market average glide path by a substantial margin. Looking at stressed situations with high levels of volatility, where the VIX is over 20 – for example, a financial crisis scenario similar to what we saw in 2008 – the risk-factor focus offers diversification benefits that are even more apparent.

Total risk management: Adhering to age-appropriate risk limits
Optimizing to age-appropriate risk throughout the glide path not only is essential to achieving our goals for an ideal glide path, but also helps to increase the chances that participants will stay invested in good and bad times.

Our risk-factor-based asset allocation is designed to produce well-diversified portfolios tailored to a participant’s age-based risk capacity. For example, when a participant has the greatest amount of time prior to retirement, say 20 to 40 years, the optimal asset allocation includes a heavy allocation to higher-return-potential assets like equities and real estate. When participants are younger, they can tolerate a higher risk level given that most of their wealth is represented by remaining human capital (present value of future wages); moreover, account balances in the early years are usually significantly smaller than those near retirement, so there is not as much at stake at the outset. On the other hand, for participants closer to retirement, say within 15 years, risk (relative to the retirement liabilities) in our asset allocation is significantly decreased, with more weight put on less risky assets, such as Treasury Inflation-Protected Securities (TIPS), nominal bonds and cash. This is consistent with our view that older participants will not tolerate a high level of market risk: They are likely to have more at stake and have less time to recover from a severe market shock than younger participants.

Of course, we recognize that even though the actual risk of a glide path should be measured in terms of uncertainty of achieving a sufficient retirement income, participants will feel and see volatility in their accounts in terms of nominal dollars. As a secondary constraint, nominal risk budgets are therefore set at levels investors can be comfortable with and will help ensure that they stay the course and continue participating in their retirement plans, even during times of heightened market volatility.

For guidance on appropriate levels of total risk, we employ PIMCO’s annual consultant survey, where we ask for consultants’ views on the maximum loss that a plan participant can incur and still meet his or her income goal. The 2014 responses are shown in Figure 5.

We compared this guidance to analysis where we estimated the maximum drawdown across each vintage of the glide path. While there is no industry standard for computing maximum potential loss on a portfolio, we applied a host of risk metrics, as well as our proprietary risk analytics, to “stress test” potential portfolios; for example, we looked at VaR, conditional VaR, volatility, portfolio equity beta and the probability of outcomes below -5% and -15%. Combining the external market perspective from the consultants with our internal quantitative analysis, the results of this iterative process were total risk budgets, or the capacity for loss, along the entire glide path leading to substantially improved outcomes versus the market average glide path, as shown in Figure 6.

To test the effectiveness of our glide path in meeting our real-income-centered objectives, we simulated typical participant experiences via long-horizon Monte Carlo simulation.1 Inputs to the model are listed in the appendix and include real-world-participant and employer contribution levels combined with PIMCO’s long-term return assumptions for the various asset classes.

Success is measured in terms of the income replacement a participant would have achieved over a typical savings period. Important metrics are the median income replacement, which is equivalent to the expected outcome, as well as the lowest achieved outcomes, which is a measure for shortfall risk. As fiduciaries, our goal is to provide a successful outcome to every single participant. Therefore, minimizing shortfall risk is of utmost importance. We also look at average outcomes but monitor this metric with care as its usefulness is limited. It is skewed by positive outliers – meaning cases when very high income replacement ratios were achieved – and is therefore not representative of a typical outcome.

As we can see in Figure 7, the PIMCO glide path significantly outperformed the market glide path on both the expected outcome (median income replacement rate) and shortfall risk (measured based on the lowest 5% of outcomes). As a sign of significant outcome uncertainty, the market average glide path achieved a slightly higher average outcome – skewed by extreme positive outliers.

The PIMCO glide path embraces a broad set of asset classes, aggressively dials down risk as it approaches the target date and utilizes a full toolkit of diversifying assets, including core global bonds, equities, emerging market bonds, high yield bonds, TIPS, commodities, REITs and emerging market equities. The PIMCO glide path seeks to provide several advantages over other glide paths:

  • Improved median real income replacement outcome;

  • Tighter distribution of expected real income replacement outcomes; and

  • Significantly fewer expected extremely low income replacement outcomes.

PIMCO offers two target-date strategies based on this glide path methodology. The PIMCO RealPath and RealPath Blend Strategies provide a next-generation solution for defined contribution plans.

Please contact your PIMCO representative for further information.

The authors would like to thank Mihir Worah, Ravi Mattu, Vineer Bhansali, Jim Moore and John Miller for their advice and oversight and especially Niels Pedersen and Sean Klein for their major contributions in the glide path development.

1Details on the simulation engine are described in "Rethinking Retirement Risk," by Niels Pedersen and Sean Klein (2014)


For more information on return simulation, see “Rethinking Retirement Risk,” by Niels Pedersen and Sean Klein.
The Author

Bransby Whitton

Product Strategist

Klaus Thuerbach

Inflation Solutions Strategist



Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. The value of most bond strategies and fixed income securities are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Certain U.S. government securities are backed by the full faith of the government. Obligations of U.S. government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. The correlation of various indexes or securities against one another or against inflation is based upon data over a certain time period. These correlations may vary substantially in the future or over different time periods that can result in greater volatility. Diversification does not ensure against loss. Investors should consult their investment professional prior to making an investment decision.

Glide Path is the asset allocation within a Target Date Strategy (also known as a Lifecycle or Target Maturity strategy) that adjusts over time as the participant’s age increases and their time horizon to retirement shortens. The basis of the Glide Path is to reduce the portfolio risk as the participant’s time horizon decreases. Typically, younger participants with a longer time horizon to retirement have sufficient time to recover from market losses, their investment risk level is higher, and they are able to make larger contributions (depending on various factors such as salary, savings, account balance, etc.). Generally, older participants and eligible retirees have shorter time horizons to retirement and their investment risk level declines as preserving income wealth becomes more important. The glide paths shown herein are for illustrative purposes only and do not represent actual portfolio investments. Participants are not invested and may not invest directly in any glide path.

The portfolio analysis is based on model portfolios constructed using index blends and no representation is being made that the structure of the average portfolio or any account will be the same or that similar results will be achieved. Results shown may not be attained and should not be construed as the only possibilities that exist. Different weightings in the asset allocation illustration will produce different results. Actual results will vary and are subject to change with market conditions. There is no guarantee that results will be achieved. No fees or expenses were included in the estimated results and distribution. The scenarios assume a set of assumptions that may, individually or collectively, not develop over time. The analysis reflected in this information is based upon data at time of analysis. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

PIMCO routinely reviews, modifies, and adds risk factors to its proprietary models. Due to the dynamic nature of factors affecting markets, there is no guarantee that simulations will capture all relevant risk factors or that the implementation of any resulting solutions will protect against loss. All investments contain risk and may lose value. Simulated risk analysis contains inherent limitations and is generally prepared with the benefit of hindsight. Realized losses may be larger than predicted by a given model due to additional factors that cannot be accurately forecasted or incorporated into a model based on historical or assumed data. PIMCO has historically used factor based stress analyses that estimate portfolio return sensitivity to various risk factors. Essentially, portfolios are decomposed into different risk factors and shocks are applied to those factors to estimate portfolio responses. Because of limitations of these modeling techniques, we make no representation that use of these models will actually reflect future results, or that any investment actually will achieve results similar to those shown. Hypothetical or simulated performance modeling techniques have inherent limitations. These techniques do not predict future actual performance and are limited by assumptions that future market events will behave similarly to historical time periods or theoretical models. Future events very often occur to causal relationships not anticipated by such models, and it should be expected that sharp differences will often occur between the results of these models and actual investment results.

Return assumptions are for illustrative purposes only and are not a prediction or a projection of return. Return assumption is an estimate of what investments may earn on average over the long term. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods.

Stress testing involves asset or portfolio modeling techniques that attempt to simulate possible performance outcomes using historical data and/or hypothetical performance modeling events. These methodologies can include among other things, use of historical data modeling, various factor or market change assumptions, different valuation models and subjective judgments.

We employed a block bootstrap methodology to calculate volatilities. We start by computing historical factor returns that underlie each asset class proxy from January 1997 through the present date. We then draw a set of 12 monthly returns within the dataset to come up with an annual return number. This process is repeated 25,000 times to have a return series with 25,000 annualized returns. The standard deviation of these annual returns is used to model the volatility for each factor. We then use the same return series for each factor to compute covariance between factors. Finally, volatility of each asset class proxy is calculated as the sum of variances and covariance of factors that underlie that particular proxy. For each asset class, index, or strategy proxy, we will look at either a point in time estimate or historical average of factor exposures in order to determine the total volatility.

Maximum drawdown is measured as the average of the distribution of maximum drawdowns across 15,000 simulated annual paths under normal market conditions. This number represents an expected peak to trough drawdown within a one year time horizon.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the authors but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2015, PIMCO.