If a pension plan is underfunded shall we follow a aggressive approach or conservative approach?
coz if the plan is underfunded and we are following a conservative approach we might not be able to meet all the liabilities of the plan. And if we follow aggressive approach then there might be a chance that the plan may become -ve. Please clear this confusion.
It depends on the Liability Relative Asset Allocation approach being followed. In the case of Hedging/Return seeking approach, if and only if the plan has a surplus, the extra portion is allocated to aggressive portfolio. If not, a conservative estimate is followed ( think lowering the discount rate of liabilities), the plan becomes underfunded, and the Funding ratio needs to be increased. Sponsor is asked to contribute more to the fund in order to hit a fully funded status.