Despite Equity Boost, LDI Favors Fixed Income

Even with strong capital market performance, many liability-driven investors decreased equity allocations this year in favor of fixed-income vehicles.

In fact, 43% of U.S. defined benefit (DB) plan sponsors decreased equity allocations thus far in 2013, and 35% reported increasing fixed-income allocations, according to an analysis released by investment management and processing firm SEI.

The total average asset allocation to fixed income among private U.S. pension portfolios reached 44%.

Analysis results show more than seven in 10 (71%) U.S. pension funds utilize a liability-driven investing (LDI) strategy, compared with 67% measured in 2012. As the name suggests, an LDI strategy involves making investment decisions largely determined by the sum of current and future liabilities attached to an investor.

According to SEI researchers, growth in LDI strategies can be explained by an increasing focus among plan sponsors on creating a holistic investment strategy that incorporates not just asset allocation, but also plan liabilities, corporate finance and enterprise risk. The goal is to protect a plan’s funded status through difficult market environments by eliminating risks that do not need to be taken to meet cash flow needs. 

Looking at the whole field of pension plans polled by SEI—including plans in Canada and the UK—nearly six out of 10 (57%) plan sponsors said their organization use an LDI strategy. SEI observed the same overall participation rate last year, representing a six percentage point drop from the high water mark measured in 2011.

LDI Goals Evolve

While overall usage for LDI strategies remains stagnant, goals for using LDI are changing.

As in previous years, SEI found the most widely cited reason for initializing LDI is to control a pension plan’s funded status liability. But this year, more plans said they are using the strategy to improve funding levels compared with 2012, pushing that incentive from the fourth- to the second-ranked position.

On the other hand, less plan sponsors ranked minimizing their plan’s impact on corporate liquidity and cash flows as the most important factor in implementing LDI. The same goes for controlling cash contributions and plan expenses.

Other results show that, on average, poll participants are allocating about half (49%) of assets to what they would define as LDI strategies. These strategies utilize a variety of fixed-income products to reduce volatility, with the most popular being long-duration bonds in the U.S. and Canada, and gilts and index-linked gilts in the U.K.

Additionally, a strong majority (74%) of glide path strategies implemented with LDI use funded status as the key trigger for automatic de-risking of a portfolio. According to the survey, more than two-thirds (69%) of plan sponsors currently use or are planning to implement a glide path strategy.

For more on SEI’s 2013 annual Global Liability Driven Investing Poll, which reached 130 corporate pension executives across the U.S., Canada and the UK, readers can visit