With Volatility Comes LDI, Risk Transfers

Cutwater Asset Management's second annual survey of over 100 corporate defined benefit pension plans across the United States shows that LDI implementation is transitioning from discussion to action.

(January 25, 2013) — Liability-driven investing (LDI) strategies and risk transfer deals have emerged as a reaction to persistent volatility and depressed funded ratios among corporate pension plans, Cutwater Asset Management shows.

Cutwater’s survey focuses on investment strategies that corporate pensions are currently implementing, showcasing the adoption of LDI to better manage pension risk. “What surprised me the most is how far along so many corporate schemes in our study were in LDI implementation,” Dave Wilson of Cutwater told aiCIO. “More and more of them are getting serious about their end game.”

While the average corporate pension in Cutwater’s survey was 75% funded last year, that number rose to 82% this year. Meanwhile, in 2012, 31% of survey participants implemented LDI. That percentage rose to 74% this year.

So what does this all reflect?

“The broader message of the survey is that corporate pensions are aggressively trying to derisk their plans to manage volatility,” Wilson said. He added that the poll of participants last year was geared toward open plans (72% of plans were open, 22% closed, and 6% hard frozen). This year, 44% of plans were open, 30% were closed, and 26% were frozen. The implication of closing or freezing a plan translates to higher adoption of derisking strategies such as LDI.

“Corporations are experiencing the problem of directing attention to their pension instead of focusing on their core business, which is another reason LDI is really gaining traction,” Wilson concluded.

Cutwater’s survey was conducted with input from aiCIO for the publication’s 2012 Liability Driven Investing Survey. Regarding increasing LDI popularity, aiCIO echoed many of Cutwater’s findings, noting late last year that the reasons for such a pickup vary, but two drivers of change did rise above the rest: contribution uncertainty and funded-ratio volatility. “Regulatory considerations, strikingly, was the least important factor driving actions—a finding at stark odds with conventional wisdom put forth by industry pundits, this magazine often included,” the survey found.

Risk transfer deals have become increasingly popular on either side of the Atlantic, aiCIO reported late last year. In early December, the UK’s Merchant Navy Officers Pension Fund announced it had secured around £680 million of members’ pension benefits in the fund’s Old Section by purchasing a bulk annuity insurance policy with Goldman Sachs’ Rothesay Life. Around half of the Old Section’s liabilities were secured through policies with specialist insurer Lucida in 2009 and 2010. Lucida was closed to new business last month. The deal was the largest to be transacted in the UK in 2012, but it is still smaller than some in previous years that were worth in excess of £1 billion. After a poor start to 2012 the market has seen something of a reasonable resurgence. In the third quarter, some £900 million was transacted and last week sugar refiner Tate & Lyle announced a buyin deal with Legal & General, worth £350 million–or around 30% of its members.

Related article: aiCIO’s Liability Driven Investing Survey 2012