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Corporate plan sponsors talk about liability-driven investing (LDI) like most people talk about dieting—they are all, in one form or another, planning on doing it, they just haven’t gotten around to it yet. (One thinks of St. Augustine’s prayer: “Lord, make me chaste, but not yet.”) This is particularly true of smaller and mid-sized plans which, unlike their larger corporate brethren, have tended to remain immune to the siren lure of LDI. The question is why.
Everything that makes LDI appealing for larger pension plans applies at least in equal measure to smaller plans. And whereas large corporations often have large staffs to deal with the pension fund, midsize and smaller companies often have only one overworked individual whose responsibility over their firm’s pension plan is only one of several hats they wear. For these people, this job is a “can’t win situation,” says Chris Keating, managing director at Cutwater Asset Management. “These plan sponsors face an asymmetric risk—there is no upside to their pension duties, only downside.” Outperformance brings little reward and underperformance can all too often mean job termination. LDI should be a perfect remedy: No more sleepless nights when the equity market tanks, and the latitude to focus on their day jobs, specifically whatever other treasury and finance functions that fall under their purview.
In reality, however, it hasn’t turned out that way. An LDI strategy requires something of a sea change: Old and cherished relationships have to give way to a new order, and underfunding has to be dealt with head-on. Smaller companies often have less access to capital, and hence are less willing to find the cash injections to bring their plans close to full funding. Instead, all too many smaller plans study LDI to death. Richard Benck, the vice president of investment and risk management at Unimin Corporation, a Connecticut-based industrial minerals group, oversees the company’s more than $100 million pension fund. Benck told aiCIO that Unimin is “exploring LDI and conversing with consultants about it.” The fund, however, does not have “a set timetable to implement LDI.” It is a story told time and time again.
The current interest rate environment provides another disincentive to act aggressively for plans of all sizes. That said, the secular trend in favor of LDI is gathering steam—the dangers of equity market risk have simply become too acute, and the incentives for assuming that risk simply too slight. Potlatch Corporation of Washington, a lumber company with a pension fund of about $300 million, provides a good example of a plan that embraced LDI in the aftermath of the 2008 market collapse. In 2009, the fund shifted its strategy so as to convert 40% of its holdings into long-credit positions. “It is the eternal struggle. People always say that discount rates can’t get any lower,” says Sean Hoagland, manager of compensation and benefits at Potlatch who helps run the company’s plan. “But history suggests otherwise.” Indeed, with a potential Eurozone crisis and fears of a global economic slowdown looming, waiting for a better time for LDI may be too risky. For plan sponsors at some mid-sized and smaller plans, LDI is a pragmatic solution, and now might very well be the best time to implement it. Their (day) jobs may depend on it.