(December 8, 2011) — Just as a newly released global poll by SEI shows that liability-driven investing (LDI) strategies have hit a five-year peak despite historically low rates, the Pension Protection Fund (PPF) has recruited four LDI managers.
SEI’s study finds that the number of pension plans adopting LDI strategies has increased significantly since last year. According to the poll, 63% of surveyed pension executives now employ an LDI investment approach – the highest outcome in the poll’s five year history and more than triple that of 2007.
Highlights of SEI’s findings include the following:
1) Almost half (46%) define LDI as “matching duration of assets to duration of liabilities,” the highest percentage selection ever.
2) The top goal of LDI continues to be “controlling the volatility of funded status,” as has been the case consistently in prior years.
3) The primary benchmark of successful pension management has changed significantly over the last four years to “improved funded status” in 2011 from “absolute return of portfolio” in 2007.
“The ongoing funded status volatility of pensions has placed increased pressure on organizations to make investment decisions that match the assets to the plan’s liabilities,” says Jonathan Waite, Director, Investment Management Advice and Chief Actuary of SEI’s Institutional Group, in a statement. “The volatility has also created a significant need for active LDI and de-risking strategies that can regularly monitor market changes and key trigger points.”
The implications of the burgeoning interest in LDI are numerous, the PPF’s recruitment of four LDI managers being the latest example. The PPF, a lifeboat for UK pension schemes, added Blackrock Investment Management (UK) Limited; F&C Management Limited; Insight Investment Management (Global) Limited and Legal & General Assurance (Pensions Management) Limited to its new panel.
SEI’s poll also coincides with several previous studies — one being aiCIO‘s LDI survey, released in November. Another study during the month by Russell Investments found strong interest from its US institutional client base in LDI. That popularity has driven Russell’s Martin Jaugietis to be named to a newly created role: director and head of LDI solutions.
Russell reported that its US-based LDI fixed-income assets under management have grown to approximately 50% of the company’s total fixed income AUM in the US as of June 30.
Jaugietis noted that corporate plans have become increasingly sensitive to the volatility of funded status, creating a greater demand across Russell’s client base for both advice and solutions. Currently, the average Russell consulting client has 38% invested in liability-hedging fixed income, up from 27% in 2006. Jaugietis also noted that as more is invested in liability-hedging fixed income, it becomes increasingly important to have a closer liability-hedging portfolio which requires more sophisticated solutions than simple duration extension.
The spark driving the popularity of LDI within the corporate pension fund universe comes from heightened regulation that demands greater solvency and higher funding ratios, along with the general longing to allow sponsors to focus increasingly on their core business as opposed to being distracted by their pension—often a pestering side problem. In 2006, the Pension Protection Act (PPA), which came into effect in 2008, provided the first set of rules forcing American sponsors to systematically contribute to their pension to carry them to full funding. Between 2003 and 2007, the funded status of plans in the US ballooned from 77% to 96%—a remarkable increase at first glance. But according to a UBS research paper by Francois Pellerin, a heightened level of contributions made by plan sponsors largely fueled the increase—highlighting a prevalent misperception among sponsors that a pure increase in equities got them out of their rut. “In analyzing the liabilities of 500 publicly traded companies with the highest pension exposure, I found that on average, the pension plan was 46% of the size of the company,” Pellerin told aiCIO earlier this year, adding that “LDI has flourished to control volatility so that plan sponsors can worry about what they’re good at—whether its building cars, making widgets, or whatnot.”