LDI Adopters Triple Since 2007

November 30, 2009 (PLANSPONSOR.com) – More than half (54%) of defined benefit plan sponsors have adopted liability-driven investment strategies, up from 20% in 2007, according to a new survey.

An SEI news release about its Global Quick Poll found that globally, 90% of respondents said “controlling year-to-year volatility of funded status” is their primary objective of LDI. The poll included pension executives from Canada, Netherlands, the United Kingdom, and the United States.

Additionally, SEI said, 70% of respondents agreed that the recent market volatility has increased the value of LDI.

Despite the increase in takeup by plan sponsors, SEI found less agreement about just what LDI actually is. Some 40% define LDI as “matching duration of assets to duration of liabilities,” while 32% said “a portfolio designed to be risk managed with respect to liabilities.”

Nearly all (98%) of the poll participants said they are using long duration bonds as part of their LDI strategy. However, beyond that, there remains little consensus. The second most common product is interest rate derivatives (40%), and additional tactics cited include short duration cash management (26%); high yield bonds (24%); and, private equity, portable alpha, hedge funds and emerging market debt (each at 14 %).

Finding Metrics

SEI said its data also indicated there has been a significant shift in benchmarking the success of pension investments globally during the past three years. In 2007, “absolute return” was the highest ranked benchmark by 28% of poll participants and in 2008 that number dropped to 20%. During the most recent poll, 15% of respondents identified “absolute return of the portfolio” as the primary success metric.

On the opposite end of this trend is how plan sponsors view “improving funded status” as a primary benchmark for pension investments. In 2007, 28% of respondents said that was a primary benchmark, but this year 42% said that was the case.

“Never before have financial executives overseeing pensions been as challenged as they are right now. The ability to build strong strategies focused on the liabilities in the plan is critical and many pension executives are looking for guidance and expertise in accomplishing this,” said Jon Waite, director, Investment Management Advice and Chief Actuary of SEI’s Institutional Group, in the news release. “The poll results highlight an increased trend towards liability driven strategies as they are a critical component of the short- and long-term approach for successful plan management.”

The third annual LDI poll was completed by 150 executives overseeing pensions ranging from $30 million to more than $5 billion in assets. A complete summary of the poll is available by emailing seiresearch@seic.com.

More information is available here.

An earlier SEI survey on the topic found that as companies attempt to regain control of pension finances, they are shifting their focus on liability matching and risk management (see DB Sponsors Focus on LDI, Risk Management).