I think there already was a question on the subject
My opinion is that, by definition, mimicking the liabilities would mean that the expected return of the plan’s assets is the discount rate,as the plan is underfunded, it begin with a lower value and therefore it could never reach the liabilities value. Another way to think of it is that to mimick the liabilities you need assets at least equal to the PV of liabilities and therefore as your plan is underfunded you cannot do it.
Because liability mimicking tracks the market risk factors, and therefore the returns on both tend to move in simillar fashion, hence it is difficult for assets to outperorm and cover the underfunding.
Yes, I know; I go the part about AO correct, but I got the liability mimicking question wrong. I did not fully understand CFAI’s rationale, which is why I was asking if the reason is because perhaps the PVs do not match.
The rational is that since you have your duration matched ( Imagine an incredible well done match), you can not benefit for a movement in interest rates, the better the match the less possible you can earn a positive (or negative) return vs the liabilities. And since every time there’s a movement in interest rate you “rebalance” your portfolio to match the assets with the liabilities sensitivities its almost imposible to beat the return of the liability. (viewed in a general case).
It is also important to mention that you can overcome the plan deficit in an AO approach but it is important to do so within an acceptable level of risk ie taking extra risk to try and claw-back a plan deficit would be considered highly imprudent and against the best interests of the plan participants/beneficiaries