LDI Moves to the Fore for DB Plans

Cerulli posits that LDI, when implemented effectively, can be “the ultimate custom solution.”

Cerulli Associates’ research shows the advent of more liability-driven investing (LDI) programs is “coincident with the broader movement toward more customized, objective-based multi-asset investment strategies for institutional investors instead of the traditional strategies that were de facto one-size-fits-all solutions.”

Cerulli posits that LDI, when implemented effectively, can be “the ultimate custom solution” and that the growth of the discipline is “inherently intertwined with the developments in the U.S. corporate defined benefit plan universe.”

According to the most recent Cerulli Corporate DB Derisking Survey of internal pension plan professionals, fully 81% say that funded status volatility is their top motivating factor for pursuing an LDI strategy. Funded status volatility is followed by accounting/regulatory pressure (62%) and the uncertainty of contributions (38%), Cerulli reports.

Overall, institutional assets rose 5.5% during 2016 to reach roughly $20.7 trillion. According to Cerulli, this represents broad-based growth across corporate DC plans, state/local DB plans, corporate DB plans (including Taft-Hartley), insurance general accounts, and nonprofit institutions. Cerulli’s proprietary sizing models suggest total institutional assets are projected to reach nearly $25 trillion by 2022.

“Relatively low long-term interest rates remain a challenge to the finances of insurance companies and to the internal investment professionals charged with company investments,” the Cerulli report concludes.

These findings are from the “North American Institutional Markets 2017: Strategies for Implementing Customized Services Across Client Segments” report. Information about obtaining Cerulli Associates research is available here.