Graphic: Lowering risk with LDI
Liability-driven investing has now long been employed by corporate pension plans to minimize volatility on their pension liabilities. A plan in good standing can match the duration of its liabilities with an LDI portfolio and eventually put the plan to bed for good. For poorer-funded plans, fewer assets can be derisked with an LDI allocation and greater market risk is needed to make up ground and immunize duration risk.
Growing interest: Data from P&I's top 1,000 largest plan sponsor survey show that corporate pension plans allocated $120 billion to LDI strategies as of Sept. 30, up 54% from 2012.
Bonds immunize: Better-funded plans are more likely to add high-grade, long-term debt to immunize duration risk.
Better grades: Globally, investment-grade debt issues have fallen to about one-third of all issues, but those from U.S. companies make up a little more than half of total U.S. issues. The more desirable long-term issues have been in higher supply.
Equity correlation: Equity returns play a key role in the progression of an LDI strategy, as annual changes in plan funded status show a close relationship with equity market performance, which may have a disproportionate effect on poorer-funded plans in down markets.
*Average funded status of the 100 largest corporate plans used in the NISA Pension Surplus Risk index universe. MSCI ACWI IMI net TR index used as market proxy. Sources: Bloomberg LP, P&I Research Center, NISA Investment Advisors LLC
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