LDI’s De-Risking Dominance

Most North American plan sponsors have already adopted liability-driven investing—but some are beginning to consider pension-risk transfers.

Liability-driven investing (LDI) remains the favored de-risking approach of North American corporate pensions, according to a survey.

Nearly two-thirds of plan sponsors said they are likely to use or already using LDI strategies in a joint study by Clear Path Analysis and Prudential. Pension-risk transfer (PRT) was less popular, with 48% of the plans surveyed answering that they were not at all likely to transfer risk to a third-party insurer.

However, the level of interest in PRT improved significantly since last year, when just 23% reported that they were considering a transaction.

Most (68%) said they believed transferring risk was too expensive—a belief Prudential argued was a “misconception.” The annuity provider suggested PRT was cheap compared with the economic costs of retaining risk, especially as liabilities increase with longevity.

“In 2014, the Society of Actuaries released new [mortality] tables, which confirms that people are living longer,” said Alexandra Hyten, vice president of pension-risk transfer at Prudential. “Plans saw a 6% to 7% increase in their liabilities as a result.”

Of the respondents already using LDI, 52% said the strategy has proven somewhat or very successful. Just 10% said LDI was even somewhat unsuccessful.

Interest rates played a large role in de-risking decisions, with 77% of plan sponsors saying that rates at least slightly influenced them when considering LDI. Slightly more (80%) said interest rates impacted their PRT decisions. Current low rates, combined with increasing Pension Benefit Guaranty Corporation premiums, could make PRT seem more attractive going forward, said Hyten.

“Many plans are at least considering borrowing,” she said. “They feel they need to fund-up their plan to eliminate that portion, so many corporations are at that trigger point right now.” 

Related: PRT Losing to LDI, Survey Finds & Pension-Risk Transfer Inevitable, Says Russell