Defined Benefit
LIABILITY DRIVEN
INVESTING
Lawrence R. Peters, CPA, EA
Plan sponsors and Retirement Committees
have been examining their Pension
Plans with the objective of “de-risking”
the plans to manage future volatility
in funding and expense. Eliminating
volatility will allow for the systematic
funding of the Plans and accelerate
the timetable for the termination of
the Plans. The methodology identified
and commonly used for achieving “derisking” is Liability-Driven Investing
(LDI).
18| FALL
8
| SUMMER
2013 2013
Liability-Driven Investing (LDI) in
brief
Traditionally, pension plan investing
has focused on maximizing returns.
LDI reorients this traditional approach,
and instead aims at reducing the risk
to funded status through investment
strategy and asset allocation. Its rationale:
if the goal of a pension plan is to meet
liabilities, then the investing goal should
be focused on that larger plan goal.
There are no hard-and-fast rules on
what qualifies as LDI; in some respects,
it is still evolving. Furthermore, LDI
objectives may differ from sponsor to
sponsor, depending on ownership and
capital structure. But all LDI strategies
seek to quantify and more closely match
plan investment returns to changes in
benefit obligations that is, liabilities. In
doing so, all LDI strategies seek to limit
the swings in funded status, changes in
contribution requirements, and impact
on the balance sheet.