Liability-driven investing: Pension risk management
Liability-driven investing (LDI) is a refocusing of the management of the plan's pension assets away from an "asset only" approach and to an approach that considers both the assets and the specific liabilities of the pension plan, as well as the financial situation of the plan's sponsor.
Success of the plan's investment strategy is then measured relative to the behavior of the plan's liabilities; how funded status improved during the period and/or the decreasing volatility of funded status.
Our liability-driven investing strategic beliefs
We believe an LDI strategy is the most efficient way to implement a risk management framework for a pension sponsor to decrease their plan's funded status volatility.
We believe an LDI strategy works best when considered as part of the total multi-asset solution, rather than thought of in isolation and as having no interaction with the return-seeking portfolio.
An LDI strategy should operate along with liability-responsive asset allocation (LRAA) glide path, especially for closed/frozen pension plans, that increases the LDI allocation as funded status improves.
An LDI strategy should be designed to reflect the behavior of all plan liabilities rather than just a subset of plan liabilities as is common with traditional LDI strategies.
Our popular Frozen Plan Handbook is an illustrative guide for those who have already frozen–or are considering freezing–their pension plan, covering industry developments such as increases in PBGC premiums, the growth of the annuity market, and the concept of "plan hibernation."
Helping clients improve their total portfolio outcomes
We are helping clients improve their total portfolio outcomes using liability-driven investing by combining these key components.
A plan management approach
Using knowledge gained from our 40+ years as consultants with major pension plans
- Asset Liability Study - Setting total portfolio multi-asset strategy (return seeking and LDI) based on the specifics of the pension plan and a proprietary projection model that forecasts future contributions, pension expense and funded status scenarios for the pension plan based on a variety of asset allocations over a 10-year time horizon.
- Setting the specific liability hedge ratio for the LDI strategy based on key rate durations and sponsor desire to minimize interest rate risk and credit risk.
- Monitoring funded status and key performance reporting statistics of the pension plan with the Pension Report Card. Monitoring the funded status on a daily basis allows a glide path to be implemented with improved precision.
- Monitor the holdings-level risk relative to the plan liability through our Total Surplus Risk Model (TSRM), which calculates the Value at Risk (VaR and stress scenarios for pension plans.
An asset management approach
Using knowledge gained from over 30 years as an investment manager
- We utilize a combination of Target Duration LDI, Treasury STRIPS, long government/credit, and derivative exposures (as appropriate) to construct a portfolio suited to meet an individual plan sponsor's liability hedging goals.
- Russell Investments' liability hedging funds are constructed using a combination of our award-winning manager research and internally managed strategies.
- Funds and portfolios are managed dynamically to take advantage of and respond to market opportunities.
- Serve as LDI completion manager as needed to provide oversight of third-party managers and seek to provide effective implementation of target strategies
Pension liabilities and regulations
Using our team of credentialed actuarial professionals
- A team of credentialed actuaries (FSA, ASA, and EA).
- Knowledge of pension regulations and environment (PPA, FAS, PBGC).
- Knowledge of plan design and impact on strategy and investments (different management strategies for open pension plans vs. closed or frozen plan design, cash balance plans, etc.).
Related LDI research and case studies
From our blog
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