Understanding Duration Matching Risks

As a portfolio manager in charge of managing a fixed income portfolio for a company with a defined benefit pension plan, you are considering the duration matching strategy to align the asset allocation with projected liabilities. The pension liabilities, which have a duration of 10 years, require sufficient bond investments to mitigate interest rate risk.

If you choose bonds with a lower duration than your liabilities, what is the primary risk you might encounter regarding the funding status of the pension plan?