The number of pension plans adopting liability-driven investing (LDI) strategies has increased significantly since last year, reports SEI.
According to SEI’s Global Quick Poll, which surveyed pension executives from the U.S., Canada, Netherlands and U.K., 63% of respondents said they now employ an LDI investment approach—the highest outcome in the poll’s five year history and more than triple that of 2007 (20%).
“The ongoing funded status volatility of pensions has placed increased pressure on organizations to make investment decisions that match the assets to the plan’s liabilities,” says Jonathan Waite, director, investment management advice, and chief actuary of SEI’s Institutional Group. “The volatility has also created a significant need for active LDI and de-risking strategies that can regularly monitor market changes and key trigger points.”
The holistic perspective of the pension plan—looking at liabilities as well as assets—in setting portfolio strategy has become predominant in 2011, as evidenced by poll responses regarding the definition and goal of LDI, as well as the benchmark for pension success:
- almost half (46%) define LDI as “matching duration of assets to duration of liabilities,” the highest percentage selection ever;
- the top goal of LDI continues to be “controlling the volatility of funded status,” as has been the case consistently in prior years; and
- the primary benchmark of successful pension management has changed significantly over the last four years to “improved funded status” in 2011 from “absolute return of portfolio” in 2007.
In terms of asset allocation, long-duration bonds continue to be a popular strategy (74% in 2011), as bonds and liability values are similarly sensitive to interest rates. Short-duration cash management is also commonly used, with 40% of respondents using it this year. Newer LDI products, such as emerging market debt (37%), continue to grow in popularity, but investments in interest-rate derivatives remained low again this year (26%).