A study released by Greenwich Associates and Northern Trust says that despite growing interest in liability driven investing among plan sponsors around the world, there remains considerable confusion about what exactly LDI entails, how associated strategies should be implemented, and how to determine its true value proposition.
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. In continental Europe, 12 percent of plan sponsors have implemented an asset/liability matching strategy utilising derivatives and one in 10 have immunised liabilities – two common approaches to LDI. In the UK, 11 percent of plan sponsors have in place an asset/liability duration matching strategy and 7 percent have immunised liabilities, while in the US no more than 3 percent of plan sponsors said they had either implemented asset/liability duration matching or immunised as of 2005.
Following the precedent established in the United Kingdom and continental Europe, regulatory and accounting rule changes are among the key drivers for US plan sponsors implementing LDI strategies. On a global basis, response to regulatory changes was cited by 42 percent of plan sponsors as a cause for implementing LDI, while three in 10 respondents cited response to mark-to-market accounting as a cause.
Plan sponsors that are considering an LDI strategy should be aware of several important barriers that will need to be addressed before implementation. Responses varied by region, with 45 percent of UK plan sponsors hindered by low interest rates and US and Canadian plan sponsors more likely to cite uncertainty about the logistics of LDI as an impediment.
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.
“The term LDI means different things to different plan sponsors,” says Lori Crosley a consultant at Greenwich Associates. “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 immunisation. To others it is a general strategy for extending duration in order to manage the risks of the portfolio. Despite 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.”