Defined Benefits Destination: Liability Driven Investments

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Defined benefit plan sponsors are increasingly looking for more options to de-risk their liabilities, and liability driven investments (aligning assets with liabilities) are providing more flexibility than traditional annuity purchases.

Liability Drive Investments (LDI) offers a more flexible solution than annuities. For example, it can be unwound or adjusted. But why wouldn’t a plan sponsor want the finality of an annuity purchase?  In some cases, where flexibility is valued – an LDI makes more sense because of the ability to adjust or change it.

What are Liability Driven Investments?
LDI refers to a portfolio management strategy intended to align assets with liabilities. Liabilities could refer to the expected benefits payments or interest rate and inflation rate sensitivity of the plan’s investments, among other things.

As with any strategy, a plan sponsor needs to look at all the considerations when making a decision.  Determining if an LDI may define the correct future path that they want to take, includes analyzing the plan’s overall objectives and constraints and how the sponsor wants to manage risks associated with interest rates, inflation rates, credit exposure and yield curve changes.

Other things to consider is that an LDI need not cover the entire portfolio, and can work for ongoing defined benefit pension plans or pensions plans that could eventually be terminated.

LDI is not a “hedge and forget” strategy.  But with the right advice and analysis, it could be an option for investment direction of a pension.  Continue reading to arm yourself with key information on meeting your return and risk management objectives in this white paper that delves into some of the key elements to think about when considering Liability Driven Investments.


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