Pension Plans Using Broad Definition of LDI

April 2, 2014 ( – Nearly half of defined benefit plan respondents (47%) to a recent survey for Prudential indicate they utilize a liability driven investing (LDI) strategy.

However, the inaugural survey, conducted by Clear Path Analysis for the “Pension Plan De-Risking, North America 2014” report, finds duration-matching LDI remains across low across the pension space. “From this statistic one might infer that these pension professionals assume they are hedging risk with a small percentage of fixed income investments, but in actuality may not be implementing a true LDI strategy, as no significant duration matching is occurring,” says Glenn O’Brien, managing director and head of U.S. Distribution for Pension Risk Transfer at Prudential, in the report.

The findings show plans with less than $1 billion in assets under management (AUM) use LDI strategies significantly more often than larger plans—another indicator that there may be a misinterpretation of what an actual LDI strategy entails.

In addition, when asked where, over the next five years, they see a significant shift occurring with regard to asset allocation, closed plans envision a migration toward fixed income (65%), while open plans seek real assets and alternatives (55%); private plans foresee a transition to real assets(65%), whereas public plans anticipate a reallocation to alternatives (71%); and larger plans express more interest to shifting to alternatives (47%) and real assets (42%), even as their smaller counterparts may look to fixed income (38%).

“I don’t think there’s a homogenous definition of LDI. In a very low interest rate environment people have adopted different fixed income strategies, possibly reallocating their existing fixed income portfolio to some longer duration assets,” O’Brien says in a survey analysis in the report. “It’s been our observation that U.S sponsors have been hesitant to adopt LDI on either a consistent basis or allocate funds in significant degree to fixed income in this environment with a continuing prospect of future rising interest rates. The adoption has generally been slow; it’s not consistent across sponsors and there is still a fairly large mismatch in the duration of plans versus assets.”

In the analysis, Rohit Mathur, senior vice president, Global Product and Market Solutions, Pension & Structured Solutions, Prudential, adds: “There is clearly a gap between the intentions and actions of some companies with respect to risk reduction… Companies are waiting for higher [interest] rates to reallocate large portions of assets to long duration fixed income...”

The survey also found 35% of closed plans, 31% of small plans (less than $1 billion in assets under management), and 27% of private open plans are considering, or are very likely to consider, transferring risk to a third party insurer in 2014. A majority of plan sponsors (93% for private plans) believe movement in interest rates will impact their decisions to implement an LDI strategy, or to execute a bulk annuity transaction.

The biggest pension plan concern for respondents with closed plans is longevity risk (100% identified this as a concern). The survey found closed plans are more aware of the impact of longevity risk on their plan liabilities (54% showed very high awareness, and 42% showed moderate awareness) than large plans (50% very high, 44% moderate) or small plans (35% very high, 42% moderate).

The biggest pension plan concern expressed by open private plans was a low-yield environment (31%), and open public plans showed more concern about current funding status (58%).