The Last De-Risking Issue?

Investors and managers alike are looking forward.

A few years ago, before my time at CIO, former Editor-in-Chief Kip McDaniel spied an opportunity: A significant portion of our target audience—and the managers and consultants that service these allocators—focused on a new-fangled investment strategy called liability-driven investing (LDI). So the annual LDI special issue was born.

Back then, for many—but perhaps not for more sophisticated investors—LDI typically meant putting money in bonds to take risk off the table. Hedging inflation and interest-rate risks with derivatives was about as sexy as things got; concepts such as glidepaths, target-date funds, and pension-risk transfers were only occasionally discussed. The very first issue in 2011 touched on subjects including the regulations behind LDI funded status, the history of LDI and its implementation, and endgame goals. 

However, each year we wrote and edited the LDI-focused issue, we found the strategy and the industry becoming more complex and advanced. More and more, liability management morphed into a holistic investing problem beyond those of just corporate defined benefit plans. In 2013, we could no longer call the special edition’s theme LDI, but de-risking. The topics we covered also surpassed fixed income and interest rates, and moved into outsourcing, risk factors, and multi-asset. 

Despite my predecessor’s best intentions, de-risking has become an outcome-oriented solutions business. (Sorry, Kip.)

This year, despite deep concerns about interest rates, expected returns, and how they would impact the overall funded status, we discovered de-risking investors and managers alike are looking forward. 

What’s the next big thing? Assistant Editor Amy Whyte explores in the cover story how investors are adapting the philosophies of LDI into defined contribution plans—and even public pensions. Another area still in dire need of de-risking innovation? Cash balance plans (“Trust me, I’ve looked everywhere,” BP America’s Mark Thompson says). Striking smart and efficient pension-risk transfer deals, even for underfunded plans, will also become more prominent in the future. United Technologies’ Robin Diamonte, who is (unsurprisingly) leading the effort, tells us how her fund’s recent $1.8 billion buyout and lump sum help her “chunk away” at the liability problem.

But we didn’t forget to look back to learn from those who knew years ago that LDI was more than a bond portfolio. IBM’s recently retired chief Ray Kanner reflects on de-risking’s evolution and the Healthcare of Ontario Pension Plan’s Jim Keohane talks about how going LDI in 2005 has helped the fund reach a 122% funded status. 

There is no doubt de-risking is getting smarter and rapidly evolving. We’re now taking suggestions on what to call the issue next year.

By Sage Um