........... ................. ' 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 Funding Ratio -♦- Payout = 0% --"-- 2.50% 5% - 7.50% -- -10% FIGURE 10.10 Required Return to Reach Fully Funded Status in 10 Years To pick out a number again, a plan that is 80 percent funded and pays out 7.5 percent of the liability value must achieve an average return of 3.2 percent per year in excess of the return on liabilities in order to reach a funding ratio of 1 in 10 years. It is clear that such return targets are realistic only with large equity allocations. Unfortunately, there is no free lunch here since higher equity allocations also increase the risk. This is the issue to which we turn next. Funding Probabilities In order to assess the probability of being underfunded at any given horizon we resort to a Monte Carlo simulation. Figure 10.11 shows the results. Initial Funding Ratio = 0.8, No Payouts Horizon Equity Allocation: -♦-0%------30% --*--70% 100% FIGURE 10.11 Simulated Probabilities of Being Underfunded, Different Funding Levels and Payout Ratios