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Liability-Driven Investing: Plan Sponsors Indicate High Interest

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Half of pension plan sponsors are using liability-driven investing strategies in their plans, down just four percentage points from 2009, according to an SEI Global Quick Poll released Wednesday. While 50% of sponsors are using LDI today, that's up from just 20% in 2007.

Liability-driven investing, according to poll respondents, means creating a portfolio "designed to be risk managed with respect to liabilities." However, 30% of respondents defined LDI as matching the duration of assets to the duration of liabilities.

Thirty-eight percent of respondents in the Netherlands, United Kingdom and United States said the most popular benchmark for measuring success in their pension plans was "improved funded status." The second most popular benchmark for success was minimizing or controlling contributions, followed by absolute returns.

Over two-thirds of respondents made asset allocation changes to their pension plans in the past year; 51% said the changes were due to consultant recommendations, and 28% said they were to control expenses.

Long duration bonds are the most popular investment product in LDI strategies, and are used by 75% of respondents. Emerging market debt and short-term cash management are gaining popularity. In 2009, 14% of respondents used emerging market debt as part of their LDI strategy; in 2010, that increased to 36%. Short-term cash management jumped from 26% to 43%. Interest rate derivatives, however, are losing popularity; in 2009, 40% of respondents used them, compared with just 24% in 2010.

“While the interest in liability driven strategies remains high, the reality is that the timing of implementation will differ from one organization to the next," Jon Waite, director of investment management advice and chief actuary of SEI’s Institutional Group, said in a release. "There are often numerous moving parts within these complex strategies and pension plan sponsors need their providers to deliver expertise and guidance.”

“At a time when funding levels are low, pensions plan sponsors need insight around how these strategies can be implemented now and in the future to best protect the plan’s funded status,” he added.