Study: Plan Sponsors Not up to Speed on LDI

November 13, 2006 ( - While liability driven investing (LDI) may be a hot topic in some retirement plan circles these days, a new study found that many plan sponsors aren't even sure how it works.

A news release from Greenwich Associates and Northern Trust said the research found considerable confusion about what exactly LDI entails. Plan sponsors also weren’t sure how associated strategies should be implemented and how to determine its true value proposition to themselves, participants and beneficiaries.

While the descriptions of LDI strategies in the study ranged from comprehensive solutions to broad guiding philosophies, most came in somewhere in the middle, according to the news release.

“On the whole, most plan sponsors interested in LDI seem to be aiming for an approach that relieves stress on the balance sheet by managing the investments in the context of the liabilities, while still generating a return that helps mitigate the opportunity costs of liability matching,” said Duane Rocheleau, managing director Investment Solutions Team at Northern Trust, in the press release.

The most commonly employed strategies among LDI users were immunized interest-rate risk with duration matching and alpha targets. The implementation rates for those strategies suggest that liability driven investing has evolved into an established market strategy in Europe and is gaining momentum among defined benefit plan sponsors in the United Kingdom, according to the announcement. No more than 3% of US plan sponsors said they had either implemented asset/liability duration matching or immunized as of 2005.

Given the survey findings, the best way for plan sponsors to ensure success in overcoming barriers and achieving successful implementation is to select strategies and providers that are well suited to specific plan characteristics, the news release said.

“The term LDI means different things to different plan sponsors,” says Greenwich Associates consultant Lori Crosley. “Despite these differences, the results of the research suggest that plan sponsors to a large degree are all seeking the same thing from liability-driven investing strategies: a greater sense of certainty.”