DBSummit07: LDI: Does it Still Make Sense for Your Plan?

Funding rule changes enacted with the passage of the Pension Protection Act (PPA) in 2006 and accounting rule changes implemented with Financial Accounting Standards Board (FASB) statement 158 have led defined benefit plan sponsors to contemplate a defensive investment strategy to manage risk and protect against losses.

align=”center”> Audio Recordings of the 2007 DB Summit Are Available Here 


Eric Palley, Director, Global Risk – Insurance and Pensions at BNP Paribas Securities Corp., told audience members at PLANSPONSOR’s DBSummit in Washington, D.C. that Liability Driven Investing (LDI) does not just protect against risk, but also is a strategy to match plan assets to the liability of benefits to be paid. He said LDI works for all plan types, even cash balance plans and non-qualified plans where a promised interest rate poses a financial risk.

Bill Quinn, Chairman and CEO at American Beacon Advisors, Inc., pointed out the trends in LDI include increasing the allocation of assets to fixed income vehicles and extending the duration of investments, including the use of swaps. These are exactly the steps his firm took for its DB plan to offset the volatility induced by the Pension Protection Act (PPA) and the Financial Accounting Standards Board (FASB), Quinn said.  Palley added that with the use of derivatives in an LDI strategy, a plan can match against the whole yield curve now mandated by the PPA for use in liability calculations. 

Quinn stated that the two groups looking into LDI the most are fiduciaries of overfunded plans and those of frozen plans that are fully funded.

Paul Bosse, Principal at The Vanguard Group, said the uptake of LDI has been slow because plan fiduciaries have other duties that keep them from taking the time to analyze investment strategies, they expect higher interest rates than fixed income vehicles deliver, and often they are following actions of their peers. He added that LDI is a new concept for sponsors and they, along with their CFOs and treasurers, need to be better educated on the concept.

According to Bosse, a gradual approach is a good idea and plan fiduciaries should present LDI to decision-makers as a way to manage surplus and help them understand how the funding equation has changed after recent regulations.

James C. Jackson, VP, Sector, Leader Assets, RiverSource Investments, LLC, said sponsors lacking the capabilities and resources to implement an LDI plan may need to outsource investment management. Quinn added that there is not one best strategy or manager choice, so plan fiduciaries should look at a variety of programs for the best plan fit.