Vive Le Liability-Driven Investing
Global Investor Magazine cites survey results from J.P. Morgan Asset Management that show a surge of interest in liability-driven investing (LDI). An impressive forty-eight percent of respondents admit to using, or planning to use, an LDI strategy. Four countries lead the way: the Netherlands, Denmark, Sweden and the UK. The common theme - regulations that "push pension schemes to value their liabilities with market rates".
Interestingly, more than seventy percent of respondents cited the need for an LDI approach, even for plans in surplus.
Some take-aways for US plans?
1. The use of derivatives by retirement plan sponsors is likely to increase as interest in LDI rises stateside.
2. Regulation and accounting standards that encourage liability management will be the likely catalysts for change.
3. Managers, consultants and plan trustees will need (and hopefully want) to become more savvy in the areas of derivative instrument valuation, risk measurement and controls.
4. Traditional asset allocation models may have to give way to a new paradigm that emphasizes portfolio splitting into separate return and liability-managed components.
This is good news, it is just common sense to look at your liability and your asset one single picture. However, once you are comfortable and understand your liabilities pretty well it could still be that you decide you don't need to care about matching them and want to invest in a way greatly unrelated to the liabilities. I think that as long as you know what you are doing it is ok.The good news is that liabilities are pretty easy to project; they increase at the discount rate and with the accrual of benefits for current members. The bad news is that such investment are rare and when they exist they don't yield much return...