LDI Adoption Steady, Definition "Fluid"

December 1, 2010 (PLANSPONSOR.com) - An SEI Global Quick Poll released last month shows that the number of pension plans adopting liability driven investing (LDI) strategies has remained steady, but there has been some movement in the definition of the term. 

The poll shows that half (50% of 110 polled plan sponsors are currently using LDI, down from 54% a year ago, but considerably higher than the 20% that were doing so in 2007.  

For the third year in a row, the most popular definition of LDI among poll participants was different from the previous year, though the top two definitions have remained consistent. “Matching duration of assets to duration of liabilities” was the most popular definition last year, but finished second this year (30%). Last year’s second most popular definition, “a portfolio designed to be risk managed with respect to liabilities,” was the top definition this year, chosen by 39% of the poll participants.  

According to SEI, organizations continued to make changes to pension investments – more than two-thirds (69%) have made an asset allocation change in the past year. While just over half (51%) said consultant recommendations drove those changes, more than a quarter (28%) said the changes were made in an effort to better control pension expenses.  

Long duration bonds (used by 75% of respondents) continue to be the most popular investment product used for implementing LDI strategies. SEI notes that interest rate derivatives saw a significant decrease in popularity over the past year and are currently used by only 24%, versus 40% a year ago.  Use of emerging market debt (used by 36%) saw a significant increase from the 14% citing its use in 2009, as did short-term cash management (43% this year, versus 26% in 2009). 

“While the interest in liability driven strategies remains high, the reality is that the timing of implementation will differ from one organization to the next. There are often numerous moving parts within these complex strategies and pension plan sponsors need their providers to deliver expertise and guidance,” said Jon Waite, Director, Investment Management Advice and Chief Actuary of SEI’s Institutional Group in a press release. “At a time when funding levels are low, pensions plan sponsors need insight around how these strategies can be implemented now and in the future to best protect the plan’s funded status.” 

According to SEI, this year’s poll results remained on par with 2009 results with only a few exceptions. The most popular benchmark for pension investment success remained “improved funded status,” selected by 38%, though this year 22% selected “minimize or control contributions,” thus surpassing “absolute return” as the second most popular primary benchmark.  

The fourth annual LDI poll was completed by 110 executives overseeing pensions ranging from US $30 million to more than US $5 billion in assets. None of the poll participants were current institutional clients of SEI.  The global poll was conducted by SEI’s Pension Management Research Panel and included pension executives from the Netherlands, United Kingdom and United States.  

A complete summary of the poll is available by emailing seiresearch@seic.com.