Every institutional investor has a unique set of challenges. And there's certainly no one-size-fits-all approach to liability-driven investing (LDI). The following is a real-world, fully-customized solution we implemented for a client along with how it fared through the 2020 downturn.
The client
- Pension plan with approximately $780 million in pension assets.
- Supporting over 4,000 employees and retirees.
- The plan was open, with a funded status of approximately 70%.
The challenge
The need to reduce volatility and contributions. The fiduciaries wanted to limit funded-status volatility and to limit the amount of cash contributions to the plan.
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The strategy
Because every plan is unique, we performed a full asset/liability study of the plan, resulting in an in-depth understanding of the plan's specific goals, objectives, contribution requirements and risk tolerances. Armed with this insight, we created a 10-year projection of liabilities, expected benefit payments, and other measurable data points relevant to the sponsor's unique regulatory environment.
This data along with Russell Investments' capital market assumptions was then input into our proprietary asset-and-liability-modeling tool to produce robust simulations. These simulations allowed the plan sponsor to assess the impact of allocation decisions on its funded status and cash contributions, without risking any actual money.
Post analysis, we implemented an asset allocation specifically designed to improve funded status over the long term while significantly reducing short term funded status risk. We maintained the allocation to return-seeking assets while reducing the funded status impact of falling interest rates. The pension plan maintained its allocation to 65% return-seeking assets and reallocated its 35% core fixed income exposure to a new LDI strategy.
The results
Three years after implementing this strategy, an updated asset/liability study showed that the plan's realized funded status is approximately 5% higher than it was at the onset of the program.
It shrunk that funding gap while also reducing funded status volatility.
Pension risk management with liability-driven investing
Our solution is designed to improve your total portfolio outcome
This is one story. But it's not your story.
As an institutional investor, your situation, your constraints, and your challenges are just as unique to you. If you're ready to demand a customized, holistic solution set, we'd like to talk.
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Rob Cittadini
MANAGING DIRECTOR