SEI found in 2007, 20% of polled organizations said they were employing an LDI strategy within pension investments. In 2008, that number grew to more than one-third (37%), and in 2009 more than half (54%) employed LDI strategies. In 2010, the number dipped a little to 50%. This year, however, the 5th Annual Liability Driven Investing (LDI) Poll found almost two-thirds of all respondents (63%) are now using this type of pension investment strategy.
Twenty-three percent of respondents said their organizations are considering employing an LDI approach in 2012. Only 14% of poll participants responded they are not considering an LDI approach at this time.
What is LDI?
Over the past five years, poll participants validated LDI is widely considered a variety of strategies customized to a specific organization and its goals. The trend of the previous years had been two definitions being more popular than the others – “a portfolio designed to be risk managed with respect to liabilities” and “matching duration of assets to duration of liabilities” – with the percentage difference between the two relatively close each year.
However, in 2011, poll respondents made a more definitive choice between these two descriptions, with almost half of respondents (46%) selecting “matching duration of assets to duration of liabilities” as the proper definition of LDI. This is the highest all-time percentage for any one definition. At the same time, while it was still the second most popular definition, “a portfolio designed to be risk managed with respect to liabilities,” saw a decrease in popularity by 15%.
For the fifth consecutive year, poll participants were asked to identify what they felt were the primary objectives of an LDI strategy and for the fifth straight year, the most popular response was to “control year-to-year volatility of funded status” (78%).One objective that saw a notable increase in popularity this year was to “minimize or maximize impact on corporate liquidity/cash flow.” Never previously having more than 35% of poll respondents identifying this as a goal, the objective saw an increase of 18% of respondents from last year’s total (23%) and may signal that this has become an increased priority.
Benchmarking Pension Investing Success
Over the past five years, the poll asked participants to identify the primary benchmark for success of the pension’s investments. This year, 85% (vs. 82% in 2010) of respondents indicated their benchmark was tied to whether or not the asset pool provided some level of support to the liabilities. “Improve funded status” remains as the most popular choice (33%) and is followed by “minimize or control contribution requirements” (25%), which saw a 3% increase from 2010. Additionally, 20% of all poll respondents said the primary benchmark for success of pension investments was to either “protect” the current funded status or “maintain” the funded status despite market changes.
Investments Being Used
Of the options provided in the poll, long-duration bonds are still the most commonly used investment product by a far margin, as bonds and liability values are similarly sensitive to interest rates. This year, 74% of poll participants said their organizations are currently using this product, a slight 1% decrease from 2010, but still the most popular choice for the third consecutive year.
The second most common product this year was again short-duration cash management, despite a slight decrease in usage (40% this year vs. 43% last year). The use of emerging-market debt continued to be strong with 37% of the poll respondents saying this is a strategy currently in use. This product saw a 1% increase from last year and is close to matching short-duration cash management as the second most popular choice.The use of hedge funds as an investment product also grew this year to 34% from 29% in 2010. There was a slight decrease (6%) in the number of poll respondents using private equity in 2011, but it remained a solid choice with 28% saying they use this product. Use of interest rate derivatives as an investment product in 2011 remained about the same as 2010 (26% versus 24%) and continues to be used less than in 2009 (40%).
U.S. Pension Plan Highlights
SEI’s 5th Annual Liability Driven Investing (LDI) Poll found more than half (54%) of U.S. participants selected “matching duration of assets to duration of liabilities” as the best definition of LDI in 2011, an increase of 16% from 2010. In contrast, the second most popular definition, “a portfolio designed to be risk managed with respect to liabilities,” decreased 14% this year, making the first definition a strong top choice in the U.S.
Nearly all (98%) poll respondents felt the LDI strategy needs to have “the ability to consider plan specifics and implement customized LDI.” Of this majority group, 51% felt it was very important and 40% felt it was extremely important.
A significant percentage (91%) felt it was important that an LDI strategy has “the flexibility to implement a distinct point of view in managing the liability hedge.” More than half (55%) of this group felt it was very important, while only 15% felt it was extremely important.
A total of 88% of U.S. poll respondents felt it was important that the investment manager serves as a QPAM (Qualified Professional Asset Manager). Of the 88%, 38% responded it was very important and 19% responded that it was extremely important.
More than a quarter (28%) of all U.S. respondents said the organization would consider hiring a fiduciary manager, which provides varying degrees of limited to full delegation of asset allocation and manager decisions. Half of the poll participants said their organizations will be issuing a Request for Proposal (RFP) before the end of 2014. Nearly a quarter (22%) said their organizations plan to issue an RFP by the end of 2012.
Of the options provided in the poll, the use of long-duration bonds was the most commonly used investment product in the U.S. in 2011, with a 6% increase in popularity from 2010 (79% versus 73%). Close behind in the U.S. and outpacing short-duration cash management on a global scale, developed market debt was the second most popular investment product among U.S. poll respondents with 70% saying they currently use it.
Another commonly used investment product, specific to the U.S. poll audience, was Separate Trading of Registered Interest and Principal of Securities (STRIPS) with 39% of poll respondents saying they are currently using or considering it.A complete summary of the poll is available by e-mailing firstname.lastname@example.org.
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