Liability-driven investing has become a hot topic as defined benefit plan sponsors move pension risk off their balance sheets. And LDI is also evolving, as the industry works to figure out how to take the LDI structure and apply it to defined contribution plans.
The timing is good, since DC plan sponsors, along with their service providers ― such as record keepers, managers and consultants ― are struggling with decumulation and trying to keep retiree assets in plan once they stop working.
“The idea of applying LDI to DC plans is essentially that it used to be your corporation that offered you the ability to match or to build retirement income,” said Serge Lapierre, global head of liability-driven investments research and senior managing director of quantitative management at Manulife Asset Management, who was interviewed on the sidelines of Pensions & Investments' DC East conference. “So we decided to apply the same kind of methodology to the DC space for individuals.”
Manulife has built what Lapierre called a “personalized DB plan for an individual.” Technically, it's called dynamic LDI.
The idea is to use the DB concept of LDI for defined contributions, before and after retirement. LDI asset allocations for DB are designed to ensure income distribution over a specified period of time, and adjusted for that allocation if, and as, needed over time. When crafting it in a DC context, participants are responsible for building their own retirement fund and spending it down in retirement without running it to zero.
“Participants want to make sure they're able to have a minimum level of income. So we build a base of bonds to match the floor of income they want for their retirement,” Lapierre explained. “But at the same time, they want some upside potential to make sure they don't outlive their assets.”
To do that, the dynamic LDI has two parts: An LDI component to match a fixed stream of income and a growth component to build the capital base.
“The way the fund is managed is that when we capture gains in the growth strategy, we lock in those gains and secure more income,” Lapierre said. “That's built into the investment strategy so the individual participant doesn't have to worry about locking in those gains or changing their asset mix.”