(December 12, 2013) — Liability-driven investing (LDI) continues to be a popular strategy among pension plans, but its goals and implementation are becoming more varied, according to SEI.
The seventh annual poll surveyed 130 corporate pensions in the US, Canada, and the UK, and found more than half (57%) of the participants said they currently use an LDI strategy in their portfolio—a slight dip from a record of high 63% in 2011—and more than two-thirds of respondents reported to have used or plan to use a glide path strategy.
“It involves setting acceptable levels of risk within portfolios and establishing key trigger points to shed risk, or de-risk, as the plan funded status improves,” the report said.
aiCIO’s 2013 Liability-Driven Investing Survey reported similar findings—more than half of 119 surveyed investors said glide path was written into their IPS as a ‘contract’ or an ‘intent’ with triggers largely based on funded ratio.
The pairing is a natural evolution of LDI strategies, according to SEI, particularly as investors’ primary goals for LDI have changed since the poll’s inception.
SEI said although plan sponsors have consistently put “control funded status volatility” first in LDI goals, they expressed more importance of “improving funding levels” and “progress toward termination” in key targets.
More than half of the respondents also said progress in funded status was their top benchmark for pension strategy success. In previous years, sponsors had depended on absolute return of portfolio.
Such change could be attributed to the improving global economy, which has allowed investors better returns, more flexibility, and even an option to re-risk.
“It’s critical that plan sponsors continue to assess current market conditions when considering asset allocation decisions,” the report said. “As markets move, the current glide path or allocation strategy may not meet the plan’s current hurdle rate, and require either additional contributions or longer periods of outperformance to catch up.”
Among US pension portfolios, SEI reported a significant decrease in allocations to US equities this year despite strong performance in the asset class. Instead, 35% of investors have increased their allocations to fixed income despite tapering talks.
In September, UBS had predicted a significant flow of US defined benefit pension capital from equities into bonds—anywhere between $35 billion and $41 billion in equity sales paired with fixed income buys of $19 billion to $22 billion.
The poll also found 67% of surveyed plan sponsors have already closed their plans and 59% have either implemented or are planning to implement lump-sum payments as additional de-risking strategies.
Related content: The Evolution of De-Risking, US Pension Plans’ Route to the Glide Path Endgame, The Risk Whisperers, UBS: Major Pension Asset Rebalancing Ahead