Updated with correction
More than a quarter of the country's largest pension funds are using a liability-driven investing strategy, according to data collected by Pensions & Investments.
Fifty-two pension funds, or 26% of those in the P&I Top 200, with total assets of $1.2 trillion and defined benefit assets of $752 billion, have reported using LDI to better match investments to their pension liabilities, according to P&I surveys and reporting.
The data show the five largest corporate pension funds using LDI are General Motors Co., International Business Machines Corp., Boeing Co., Ford Motor Co. and Verizon Communications Inc., while the largest public pension fund using the strategy is the Public School Retirement System of Missouri.
The interest rate environment in recent years has contributed to growth in pension fund liabilities as AA-rated corporate bond yields have dropped to 3.94% as of Feb. 22 from 5.78% at the beginning of 2008.
That rate environment has presented a poser for institutional investors. Given the low rates, low funded status, higher contributions and a thirst for alpha, some experts say the timing for LDI might not be good, while others say LDI is a long-term strategy, not a flavor of the month, and so anytime's a good time to jump in.
“It's a big concern out there,” said Tom McAuliffe, New York-based managing director and head of global institutional consulting at Bank of America Merrill Lynch, which manages $38 billion for defined benefit plans. “Is it the right time for LDI? Do we ride out rates now?”
“Every investor should be liability sensitive,” said Seth Masters, chief investment officer, asset allocation, at AllianceBernstein LP in New York. “The question is, who should be liability driven?”
“It's the question we live with all the time in this space,” added Andrew Johnson, Chicago-based managing director and head of LDI at Neuberger Berman Group LLC. “For many plan sponsors, it's a hard sell.”
What makes it a hard sell is that some DB plan executives still look at their strategies from a performance-centric perspective. What is driving plans to consider LDI is a change in focus to risk management, along with a look at pension funding as part of a company's overall risk strategy.
“At the end of the day, the liabilities are what drives the decision” as to whether to adopt an LDI strategy, said Gary Veerman, Chicago-based head of LDI at Legal & General Investment Management America. “How much interest rate risk and credit spread risk you want to hedge, and how much risk tolerance do you have.”
“The LDI question breaks into two pieces,” said Mark Ruloff, director of asset allocation for Towers Watson & Co., based in Arlington, Va. “What to do with your fixed-income portfolio, and do you want to increase your fixed-income portfolio? For the first part, the best way to hedge liabilities is with a fixed-income portfolio. The second part is more challenging given the current fixed-income environment.”
In an online survey conducted jointly in March 2012 by P&I and Rocaton Investment Advisors, two-thirds of DB executives said they have LDI strategies in place, with the number expected to rise to more than 80% by 2014. Also, a majority of LDI users said they would move more money to LDI strategies — and away from growth asset classes such as equities.