More than half of pension funds employ LDI strategyNews added by Benefits Pro on December 13, 2013

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By Dan Berman

More than half of pension funds are using a liability driven investment strategy to cut risk, according to SEI’s 7th annual Global LDI poll.

Of the 130 companies polled in the U.K., Canada and the U.S., 57 percent said they employed such a method, which often relies on bonds, the same as in 2012. In the U.S., 71 percent of respondents said they use the derisking strategy.

Those plans that used other investment strategies cited underfunding, low interest rates and reluctance to give up investment returns as reasons for staying away from LDI.

“While the survey didn’t see an increase in LDI in 2013, the consistent use of such strategies by plan sponsors proves that LDI has a place in the pension portfolio through changing market environments,” said Jonathan Waite, director of investment management advice and chief actuary of SEI’s Institutional Group. “It’s critical that plan sponsors continue to assess current market conditions as part of an active asset allocation approach when managing their portfolio.”

The average fund, the poll found, allocated 49 percent of its portfolio to LDI products, including long-duration bonds, which are used by 72 percent of funds in the U.S. and Canada.

Among U.S. firms, the average pension fund allocations were: fixed income, 44 percent; domestic equities, 26 percent; international equities, 14 percent; alternative investments, 8 percent; real estate, 3 percent; inflation protection, 2 percent; and other, 2 percent.

The survey by the wealth management firm also found the way retirement systems measure success has changed. In 2007, more funds used absolute return of a portfolio as the key benchmark. This year, more than half said improved funded status was most important.

Companies are pursuing other derisking strategies in addition to liability driven investing. Two-thirds of U.S. sponsors have closed their plans to new employees. Fifty-nine percent said they had offered lump-sum payments or planned to do so.

Nearly half (41 percent) of sponsors said they had investigated terminating their plans. A third said the cost of doing so was more than expected. The rest said it was what they had anticipated. No firms said they planned to terminate their pension plans.

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