Despite growing interest in liability driven investing among plan sponsors worldwide, there is still confusion about what LDI actually entails, how associated strategies should be implemented and how to determine its true value proposition to plan sponsors.
“The term LDI means different things to different plan sponsors. To some of the 140 plan sponsors we interviewed in Europe and North America, LDI is a synonym for asset-liability matching or even total immunization,” says Greenwich Associates consultant Lori Crosley. “To others it is a general strategy for extending duration in order to manage the risks of the portfolio.”
Regardless of these differences, the results of the research suggest that plan sponsors to a large degree are all seeking the same thing from liability-driven investing strategies: a greater sense of certainty.
“On the whole, most plan sponsors interested in LDI seem to be aiming for an approach that relieves stress on the balance sheet by managing the investments in the context of the liabilities,” says Duane Rocheleau, managing director investment solutions team at Northern Trust, “while still generating a return that helps mitigate the opportunity costs of liability matching.”
Among the key findings of the research are the following:
-Liability driven investing has evolved into an established market in Europe and the United Kingdom and LDI is gaining momentum among plan sponsors in the United States.
-Following the precedent established in the United Kingdom and continental Europe, regulatory and accounting rule changes are among the key drivers for U.S. plan sponsors implementing LDI strategies.
-Plan sponsors that are considering an LDI strategy should be aware of several important barriers that will need to be addressed before implementation.
Given the survey findings, experts from Greenwich Associates and Northern Trust say, the best way for plan sponsors to ensure success in overcoming barriers and achieving successful implementation is to select strategies and providers that are well suited to specific plan characteristics.
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