Interest in LDI continues to grow among U.S. corporate defined benefit pension plans, but implementation will rise significantly only after long-dated bond rates rise, said John Haugh, research analyst at Banc of America Securities.
In a client note today, Mr. Hough referenced a Banc of America Merrill Lynch survey of 111 institutional investors last year that found that 59% of respondents cited both low pension funded status and low interest rates as hurdles for moving into liability-driven investing. Thirty-five percent of respondents were investment executives at corporate pension plans.
To address these hurdles, corporate pension funds are preparing to implement LDI strategies when certain triggers, or levels of funded status and/or interest rates, are reached, Mr. Haugh said.
Corporate pension funds — especially those with assets in excess of $1 billion — believe interest rates will rise, thereby lowering pension liabilities and improving pension funding status, he said.
Significant moves into LDI won’t begin until plans’ aggregate funded status rises five percentage points to 90%, Mr. Haugh said. “Many large plan sponsors are on the sidelines waiting for this to occur and are prepping implementation when interest rate triggers are met,” he wrote in the client note.
Mr. Haugh said that some experts believe assets will flow into LDI strategies regardless of market conditions.
“I don’t think so,” he said in a phone interview. “It’s an awfully expensive proposition right now.”