Liability-Driven Investing (LDI)
Pension risk management strategies
Designed to improve total portfolio outcomes
How do you manage the risk of unfunded liabilities?
We know what's at stake. People are depending on the future payouts of your pension plan in order to fund their retirement years. As a fiduciary, it's your responsibility to manage your organization's pension plan in the context of the promises made to your employees and pensioners. A liability-driven investment strategy - matching assets to liabilities - is an efficient means to manage the risk of not meeting those obligations.
What is liability-driven investing?
Liability-driven investing, or LDI, is an approach that focuses the investment policy and asset allocation decisions on matching the current and future liabilities of the pension plan. LDI can effectively manage portfolio risk and help minimize the impact of the pension plan on the organization’s financial health.
LDI shifts the focus away from simply maximizing the return of the asset portfolio toward improving and stabilizing the funded status1 of the plan. Success of the plan's investment strategy is measured by three things:
How well it does at gaining enough assets to cover all current and future liabilities
Whether or not the funded status improves
Reduction in the volatility of the funded status relative to prior strategies
How does our LDI solution help solve the problem?
Delivering a customized liability-driven investing solution
While LDI has become a well-known approach, it is most certainly not a one-size-fits-all solution. The portfolio needs of each Defined Benefit (DB) plan sponsor are driven by specific circumstances related to funded status1, plan status2, institution type and the overall health of the organization. Our flexible implementation platform and broad actuarial and advisory capabilities offer clients a robust range of liability-driven investing solutions tailored to a client’s current situation and designed to evolve as those needs progress.
Drawing on decades of global experience working with some of the world’s leading pension plans, we will work alongside your team to develop a tailored LDI strategy that focuses on the behavior of the total asset portfolio, fits your organization and delivers real, lasting value for your pension plan.
Our specialists will:
1. Use innovative tools
To fully and deeply understand your situation and then identify and articulate your plan goals and objectives.
2. Analyze and model key risk factors
Such as interest rate, inflation and duration3 risks—on projected future liability cash flows. Ensure that downside risks are understood and acceptable.
3. Construct a liability benchmark
To more closely match the duration of your plan liabilities so you can better determine whether plan assets are generating sufficient returns to meet obligations to current and future retirees.
4. Select an appropriate asset allocation strategy
To better manage duration and interest rate risk on plan liabilities.
5. Define the non-LDI assets as return-seeking assets
Manage them in a risk-aware manner with a goal to improve funded status as well as offset new benefit accruals.
6. Implement and monitor the asset allocation strategy
Adjusting as warranted as the needs of the plan change.
What sets us apart
Why choose Russell Investments for liability-driven investing?
Good strategy requires effective implementation that can both contribute to returns and reduce risk. This is where we excel. We bring a combination of plan management experience and expertise with robust implementation capabilities as an asset manager. The strategies we design and recommend to our clients are made with full knowledge of how these strategies can be put to work effectively and efficiently in the market. And then we dynamically manage4 these strategies, looking out for our clients’ best interest as their plans evolve over time.
From strategy to execution, we will align ourselves with the best interests of your organization and deliver an end-to-end solution that aims to improve the total portfolio outcome for your plan.
We'd love to talk.
Please reach out to me directly through this form.
Tom Lappalainen, CFA
Director, Client Portfolio Management
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1 Funded status refers to the extent to which a pension plan's liabilities are "funded" by plan assets.
2 Plan status is based on a pension plan being open to new plan members and managing investments on their behalf or being closed.
Examples include open/ongoing, frozen or terminated pension plan.
3 Duration is the number of years required to recover the true cost of a bond from its purchase date and is a means to measure how sensitive the bond is to a change in interest rates.
4 Dynamically manage refers to actively adjusting portfolios, based on our manager research insights and strategists' capital market views.
5 Treasury STRIPS are U.S. bonds that are sold at a discount to their face value and pay full face value at their maturity.