US Corporates Worry Over Liabilities, Respond with LDI Focus

(March 1, 2011) — A new MetLife report has shown that underfunded liabilities is a top concern among US corporate plan sponsors. The response: Liability-driven investment (LDI), a strategy often used by most corporate funds to limit volatility.

“With the top two risk factors on the liability side of the asset-liability equation, followed by two asset-oriented factors, we believe the asset-centric focus on investment returns that characterized the inaugural study in 2009 has given way to one that suggests that there is a growing interest on the part of plan sponsors to manage plan assets in the context of plan liabilities,” Cynthia Mallett, vice president in MetLife’s product and market strategies unit, said in a news release about the study.

According to MetLife’s 2011 US Pension Risk Behavior Index survey, 60% of the times they were asked, respondents said asset and liability mismatching was their most important risk factor, while 45% of the times they were asked, asset allocation was the biggest risk factor.

Following the underfunding of liabilities, asset and liability mismatch was ranked second in priority. Asset allocation and meeting return goals followed as top investment-related risks, yet their selection rates were much lower than that of the top two risk factors, the report said, suggesting that plan sponsors are now focused on managing plan assets in the context of plan liabilities.

The MetLife study, which surveyed 149 corporate plan sponsors from among the 1,000 largest U.S. defined benefit (DB) pension plans, measures plan sponsors’ aptitude for managing – and attitudes about – 18 investment, liability and business risks to which their plans are exposed.

Earlier this month, an SEI poll revealed that pension plan sponsors say their number one priority for the coming year is finding a way to control funded status volatility. The study drew further attention to the uptick in the use of LDI. In an earlier poll, SEI revealed pension plans are increasingly adopting LDI strategies, with the UK and Netherlands in the lead. The firm’s fourth annual global LDI Global Quick poll showed that 100% of respondents from the Dutch market are incorporating an LDI approach. Following the Netherlands, the UK came in second place with 67% of respondents either currently using an LDI approach or expected to use the strategy in the next year. “Improved funded status” was ranked as the most popular benchmark for pension investment success. A total of 22% of respondents selected “minimize or control contributions,” surpassing “absolute return” as the second most popular primary benchmark.