Plans Increasingly Use LDI Strategies but Lack Understanding

August 28, 2008 ( - In addition to an increase in the implementation of liability-driven investing (LDI) strategies by pension plans, the results of an SEI Global Quick Poll revealed there is still no consensus on the goals or definition of LDI.

Comparing the recent poll conducted by SEI’s Pension Management Research Panel with one conducted by the same group last year, SEI found an ongoing change in how plan sponsors are defining LDI with “a portfolio designed to be risk managed with respect to liabilities” (34%) and “matching duration of assets to duration of liabilities” (30%) being the most popular definitions. “The concern is that LDI implementation is taking place without a solid understanding of the potential risks,” said Al Pierce, Managing Director, Advisory Solutions for SEI’s Institutional Group, in a press release. “Many financial executives are surprised to learn that improper implementation of some of these strategies can actually hurt the plan’s funded status.”

Further, poll participants continue to identify very different goals and benchmarks for LDI strategies, with more than half (57%) saying that increasing or maintaining funded status was the benchmark for success and 20% saying absolute return was their goal. “Plan sponsors need to know the specific strategy and how that impacts their individual goals before making asset allocation decisions,” said Jon Waite, Chief Actuary for SEI’s Institutional Group in the release.

Factors driving LDI asset allocations included:

  • 38% consultant recommendation,
  • 28% recommendation from internal board or committee,
  • 16% need to better control pension expense,
  • 15% plan design changes, and
  • 14% poor investment performance.

The poll revealed an increased adoption or consideration of a broader range of investment products including private equity investments (44% vs. 28% in 2007) and high yield products (39% vs. 34%).   Other investments being considered or used by poll participants include: long duration bonds (71%), short-duration cash products (34%), interest rate derivatives (37%), and portable alpha strategies (26%).

The poll was completed by a total of 160 executives overseeing pensions ranging from $30 million to over $5 billion in assets, none of which are current SEI institutional clients.

A complete summary of the poll is available by emailing .