Russell Suggests New Liability Investing Approach

April 21, 2009 ( - Russell Investments on Tuesday released research advocating what the firm said was the next version of liability-driven investing - liability-responsive asset allocation.

A Russell news release said the process it is suggesting represents “a dynamic approach to strategic asset allocation that ties pension fund investing policy to changes in liabilities and a plan’s funded status.”

Reorienting a pension plan’s investments around liabilities alters the risk-reward tradeoff that underlies fundamental asset allocation decisions, Russell said. For an increasing number of U.S. defined benefit plans – most notably frozen plans and others with low benefit accrual rates – the expected benefit of an equity-oriented investment strategy reduces as funded status improves.

“The formalization of dynamic asset allocation allows pension plans to automate the fine tuning of their investment policies more timely than in the past and as their circumstances change by placing liabilities and funded status at the core of all pension plan investment decisions,” said Michael Hall, director of investment strategy, in the news release.

Bob Collie, director of investment strategy and one of the research authors, contended in the news release that the process provided the ability to change a plan’s investments in the face of a major funded status change.

“Other things being equal, the stronger a plan’s funded status becomes, the more the risk-reward balance shifts away from aggressive strategies,” said Collie. “Liability-responsive asset allocation allows a plan to adopt an appropriate level of equity investment at a particular funded status, while also allowing for automatic adjustment of that strategy if funded status changes materially.”

More information is available here .