Learn how LDI strategies may protect pension plans from market risks and enhance long-term financial stability.
Liability-driven investing (LDI) has been around for decades and has many applications. From a pension perspective, LDI is used to hedge or offset certain market-related risks held in the pension liabilities that could impact a defined benefit (DB) plan’s funded status (the ratio of assets to liabilities). A plan’s funded status affects the sponsor’s balance sheet, contribution requirements1 and Pension Benefit Guaranty Corporation (PBGC) premiums, among other important measures. The absence of LDI could leave corporate plan sponsors severely exposed to interest rate risk; a risk that we generally do not expect to be compensated for over time.
This paper breaks down the key strategies used to design and manage LDI portfolios for U.S. defined benefit (DB) plans, focusing on hedging interest rate risk, managing credit spreads, and adapting to shifting yield curves. With decades of research and insights, the authors explain how a well-constructed LDI strategy can significantly reduce asset/liability risk while keeping your portfolio aligned with long-term goals.
1 The magnitude of LDI impacting contribution requirements will depend on whether they have elected the Full Yield Curve for funding liabilities. See Owens, J., (2024). “Synchronize your Pension Liabilities”, Russell Investments Research.