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Pension funds that used liability driven investing (LDI) strategies outperformed funds with traditional asset allocations in 2008, according to Watson Wyatt.

Typically, LDI emphasizes the use of long-duration bonds, liability hedges and asset diversification while lowering exposure to equities. Portfolios using LDI strategies likely had returns in the range of negative single digits to break even, while traditional asset allocation strategies likely yielded 20% to 30% losses, or more.

Watson Wyatt constructed a hypothetical LDI portfolio and a hypothetical traditional portfolio in December 2007 and tracked them on a monthly basis. For 2008, the hypothetical LDI portfolio broke even, while the traditional portfolio suffered a 25% loss.

“New accounting and pension rules—and the desire for more predictable returns—have prompted some companies to adopt LDI strategies in recent years,” says Carl Hess, global head of investment consulting with Watson Wyatt.

“However, most companies are still using traditional allocations or are in the process of phasing in LDI strategies,” Hess said.

Last year, the long duration bond benchmark was up more than 8%, and interest rate swaps had some returns in excess of 30%.

Asset diversification, however, did not work as well because most securities—U.S. large and small caps, international equity, real estate and hedge funds—declined in value together. However, diversification proved valuable, as alternative asset classes generally did not have the same extent of declines and hedge funds continued to help risk control.

“Although the liability hedge worked in 2008, last year’s high positive returns on swaps and long bonds will not likely continue going forward,” says Mark Ruloff, director of asset allocation with Watson Wyatt. “Despite this, the full range of liability hedging options has gained new credibility, and the recent financial turmoil has proved that its appropriate use has a definite value in controlling and managing risk.”

Read Watson Wyatt’s Funded Status Watch Report here.

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Sun Life Financial Introduces Enhancements to Critical Illness Insurance

Sun Life Financial has enhanced its critical illness insurance offering, becoming the first provider in Canada to cover Acquired Brain Injury (ABI), damage inflicted by traumatic injury, anoxia, or encephalitis.

ABI can result in prolonged or permanent impairments such as short-term memory loss.

Sun Life researched the condition for over a year, working with its medical team and partners who have experience with ABI plans in the UK, to develop definitions and coverage guidelines.

The firm has also unveiled a new long-term care conversion option, which allows policyholders to convert their CI coverage to LTC, guaranteeing their coverage regardless of their health. The LTC policy has an unlimited benefit period.

If the CI policy includes the return of premium on cancellation option, the policyholder can receive the amount they have paid in CI premiums when they convert to the LTC product.

Loss of independent existence has been added as an optional benefit, offering protection against physical and cognitive impairments not specifically covered by the CI policy.

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Fewer Companies Adopting High-cost Retirement Programs

In the current economy, many companies are looking for ways to lower the costs of their retirement benefits while still encouraging their employees to invest wisely for retirement. According to a recent Hewitt Associates survey, there are fewer employers adopting top retirement features such as automatic enrollment and company matches.

Hewitt’s survey of roughly 150 mid- to large-size employers indicates that 51% currently offer automatic enrollment, compared to 44% in 2008. However, among the companies that don’t currently offer the feature, only 25% are somewhat or very likely to add it for new hires, and just 15% are likely to adopt it for existing employees in 2009, down from 57% and 27%, respectively, in 2008.

Of those companies not planning to add automatic enrollment, 55% said the increased cost of the employer match was the main reason why they weren’t planning to offer it.

The survey indicates that just 2% of employers have cut or temporarily suspended their 401(k) company match and 5% are expected to do so in 2009. However, this could increase to 10% or more in the next 12 to 18 months, according to Hewitt, depending on the length and severity of the current recession.

“The continued bleak economic outlook is forcing many companies to make difficult decisions with respect to their retirement benefits,” explains Pamela Hess, Hewitt’s director of retirement research. “The reality is that automatic enrollment and matching employer contributions can be two of the costliest discretionary expenditures companies incur in a given year.”

Instead, companies are focusing on offering more lower-cost strategies—such as automatic rebalancing and target date funds—in order to mitigate costs and stay fiscally responsible.

According to the survey, 77% of employers now offer target date funds—up from 66% last year—and among those that do not currently offer them, 53% plan to add the funds in 2009. In addition, 49% of companies offer automatic rebalancing—a tool that helps employees regularly balance their portfolios with their target allocations—and another 20% are likely to add the feature in 2009.

Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com