2021 Liability-Driven Investment Survey

LDI Strategies Survived the Pandemic, and Then Some

Stocks may be way up, but private plan sponsors still escalate their devotion to de-risking.

Pandemic? What pandemic? Liability-driven investment (LDI) has proven itself by delivering decent returns in the wake of the coronavirus.

No wonder it is increasingly popular among private employers that sponsor defined benefit (DB) pension plans. This year’s survey confirms that the de-risking movement, as LDI also is known, continues to gather momentum. And this comes even as the bull market in stocks has kept up its mighty pace since March 2020, in the wake of the pandemic’s initial onset.

Regardless of their relatively conservative asset allocations, private-employer pension funds have managed to expand their funded levels. “They came out of the shadow of the pandemic very well,” said Sean Kurian, Conning’s head of institutional solutions and a veteran adviser to pension plans. “They fell in the second quarter of 2020 and then recovered, so that their funding levels increased.”

This was a harrowing journey. By Wellington Management’s stats, corporate DB plans started out 2020 at 87% funded, then fell to 77% in the depths of the COVID-19-propelled market selloff in March last year. Next, however, they climbed all the way back to 88% by January of this year.

The heady times before the 2008 financial crisis are now a cautionary tale for private plans, which then were focused simply on enlarging their assets. They gave less attention to the obligations they’d eventually face—when employees retired and claimed DB pension benefits. Aside from folding plans or limiting access to them, sponsors turned to closely examining what they’d end up paying to beneficiaries. While many different LDI strategies exist, their core credo is to enhance less-risky assets as opposed to the risky kind (i.e., stocks), with an unwavering commitment to matching their holdings to plan participants’ retirement payouts.

A look at the pre-LDI era: In 2005, just prior to the financial crisis that eviscerated stocks, the average equity allocation was 60%, with 30% in fixed income, Milliman data indicate. By 2019, that had changed radically. Equities had fallen to 32.5% and fixed income had risen to 49.1%. And our survey shows that stocks have shrunk even more as a part of the asset allocation pie, last year comprising 31% versus 54% for fixed income. And this year, the trend kept going, with 26% in equities and 56% in fixed income. There’s no doubt that LDI is popular among private employers, with 88% saying that is their preference, compared with just focusing on assets.

As fixed income is the go-to asset for LDI, that raises the specter of inflation making bond holdings suffer. Despite the concentration on bonds, reaping decent returns from fixed income is a doable proposition, says Insight Investment, which advises employers on LDI strategies. The firm calculates that stocks and corporate bonds had an identical ability to out-perform inflation, 74% of the time. To be sure, stocks do outpace company bonds, return-wise, 16.1% to 6.8% over inflation, the firm concedes.

Nonetheless, given the high funded levels of private-employer plans, the thinking goes, sponsors can afford to surrender some potential performance. Typical of private-sector pension programs, half of those in our survey were more than 100% funded, and just 5% had a funded status under 80%. Almost three-quarters of them had seen their funded level grow by 4% or more from its pre-pandemic level.

The vast majority of our respondents were for-profit companies, whether publicly traded (68%) or privately owned (15%), with the rest divided among the likes of nonprofits and medical care organizations. And they were overwhelmingly in the US, some 98%. Just over half had assets under management (AUM) ranging from $1 billion to $15 billion, with one-tenth logging more than $25 billion.

In terms of access to DB plans, just 20% of the plans were open to new employees and allowed them to start accruing benefits. But 31% were closed to new joiners and 40% had frozen future accruals. What’s more, 14% were looking to do employee buyouts and 7% to end their plans. —Larry Light

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The 2021 Liability-Driven Investment (LDI) Survey combines results from two surveys, one that captured feedback from pension asset owners and a second that examined providers of liability management and de-risking services. The asset owner survey gathered feedback on the LDI-related asset allocation, risk management, and provider-sourcing strategies employed by responding organizations and received a total of 137 submissions. The service provider survey collected information related to the experience and capabilities of each of the 13 respondents.

Data has been aggregated and organized into industry trends and provider summaries, which include asset owner satisfaction with various provider attributes/services. To qualify for satisfaction rankings, providers needed to be rated by a minimum of 10 asset owners. To contribute to future LDI surveys, to receive more information, or to get details on reprints or licensing of associated LDI data, please contact surveys@issmediasolutions.com.

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