Liability Driven Investing (LDI) - Three Reasons For Caution in Today's Implementation

One of the primary goals of an LDI strategy has been to try to control year-to-year volatility of the pension plan's funded status by providing a return on assets that was aligned with the return on overall liabilities of the plan.

Historically, some of the more popular tools used in LDI portfolios have been:

• Increased allocation of fixed income
• Use of long-duration bonds
• Use of interest-rate swaps

Long-duration bond strategies continue to be viable options in the current market environment because bond and liability values are similarly sensitive to interest rates and move in tandem. However, given the market environment, the implementation of these strategies, including the use of interest rate swaps, may not currently be as effective as they have been in the past. As financial executives consider LDI strategies as a possible response to a volatile market environment, this article discusses three considerations as to why the timing requires a judicious approach.

Liability Driven Investing (LDI) - Three Reasons For Caution in Today's Implementation (PDF)