Long-duration manager outflows are expected to total about $20 billion through the second half of 2009, down significantly from the four preceding years, when institutional investors poured an estimated $165 billion into liability-driven investment strategies, according to Bank of America/Merrill Lynch's July Pensions & Endowments report.
An overall desire to reduce surplus volatility within corporate pension plans, however, will likely increase future flows into long-duration strategies, according to the report.
The report attributes the decline in LDI strategies to poorly funded corporate pension plans.
“As of July 31, 2009 we estimate the funded status of the average U.S. S&P 500 pension plan at just over 75%,” the report states. “At this level, many plan sponsors may believe a bondlike investment strategy, matching assets to liabilities, would lock in an already poor funded status.”
Poorly funded plans and cash-poor corporations might have little choice but to maintain or increase asset risk, betting that equity returns will improve their pensions' funded status.