“The word ‘evolution’ is really key in our discussion of LDI because no one is suggesting that we have seen, or need, a revolution,” said Brett Cornwell, CFA and Client Portfolio Manager in Fixed Income at Voya Investment Management. “Historically, what we might call LDI 1.0 has worked and has provided a good foundation for plan sponsors focused on de-risking their plans and hedging their liabilities. It’s natural for plans to evolve their LDI programs as they become better funded and have a clearer road map to achieve plan objectives and to meet the future expected promises,” he said, at Pensions & Investments’ Managing Pension Risk & Liabilities virtual conference in October.
“This evolution has often led to higher allocations to fixed income, which has largely resulted in increasing exposure to corporate credit that has introduced unintended risk factors such as issuer concentration. Plan sponsors may think they can diversify by adding additional managers, but if the managers are all fishing from the same limited universe of corporate bonds, they are not be getting the level of diversification plan assets need,” Cornwell said. “To be clear we are not suggesting a wholesale move away from corporate credit, but we do advocate for adding non-traditional asset classes such as investment-grade private placements, commercial mortgage loans and securitized assets, to enhance the LDI program and reduce the impact of issuer concentration. Ultimately, it will improve the efficacy and efficiency in the way plans hedge their liabilities,” said Cornwell, speaking at the session titled ‘The LDI Evolution.’