Speaking at the 2012 PLANSPONSOR National Conference, Kendall explained that the whole idea of LDI is to align a defined benefit (DB) plan’s bond portfolio to move in concert with its liabilities.
Bart Pushaw, principal at Milliman, said the first step is to look at a plan’s liabilities and create a glidepath for asset allocation. Plan sponsors must look at the interest rate risk of their DB plans. The second step is to find bonds to offset interest rates, and the third step is to add complexity, such as adding derivatives.
However, Kendall warned conference attendees to be careful when adding derivatives or an extended duration bond fund, saying often sponsors can do things more efficiently with a simple approach.
John Pickett, SVP, a financial adviser at CAPTRUST Financial Advisors, said the LDI strategy must be put in writing in a plan’s investment policy statement (IPS). Sponsors also must set up a decision-making process. In addition, according to Kendall, a plan’s LDI investment manager must know the stages of the LDI strategy and how to adjust the glidepath for changes in funding.
Pickett contended that most plan sponsors would say the end game of LDI is a buy-out (see “PSNC 2012: Five Things to Know About Pension Risk Transfer”), but sponsors also have the choice to keep their plan with risks controlled.