Is this heavy reliance on LDI by some pension plans prudent? This strategy is expected to safeguard the assets of the plan and deliver the needed return. Current investment thinking resets the traditional approach to LDI into a high-beta large bet on economic growth as represented by debt, real estate, infrastructure and private equity, since these are the assets that provide the needed term and assumed return. On the surface, economic growth of 1% to 2% plus interest rates of 2% to 3% does not suffice, necessitating assumption of credit risk and sector/geography selection component to boost returns.
The original LDI model emphasized a fixed-income approach founded on certainty of coupon payment and principal return. The new version makes assumptions that returns will provide for liabilities, but it has resulted in a bidding up of marginal assets and opportunities in illiquid, hard-to-value investments.
The premise that one always gets paid for long-term illiquidity should be critically examined in light of the unknown unknowns, and unanticipated technology-driven business disruption in retail, real estate, energy, entertainment and transportation, as well as the large number of alternative, more active approaches available. Pension plans can participate in a variety of business models that have a higher liquidity aspect, high expected return and don't wait for long periods to realize value.