Liability-Driven Investing (LDI)
The BlackRock Multi-Asset Client Solutions group uses the firm's full range of investment capabilities, strategies, and vehicles to help plan sponsors construct tailored liability-matching and liability-plus solutions. We collaborate with clients at all stages of portfolio design; providing them with risk measurement, experienced guidance, and practical approaches.
1. What has changed? Why should I be interested in LDI right now?
Pension plans formerly operated in an environment in which liability values were rarely marked to market, and where smoothing and deferred recognition were the norm. But much has changed. The size and scope of today's plans often overshadow the resources dedicated to managing them. Mature plans may be closed or in various stages of run-off. Accounting and pension funding rules have also translated their mark-to-market asset-liability (i.e., surplus) risk onto their plan sponsors via balance sheet and cash-flow requirements. Further changes to income statement recognition are also expected. All the above contributes to a more risk-aware environment than ever and an increased appetite for a liability-driven investing approach. Currently, poor funding ratios are a result of inadequacies of past approaches.
Views from BlackRock: Pension Accounting Reform (June 2011)
Read this brief article for an overview of recently announced pension accounting changes from the international Accounting Standards Board and hear from three of BlackRock's LDI and accounting experts on the broader implications.
Monthly Pension Update
For Canadian pension plans in deficit, it’s not good enough for asset growth to keep pace with liabilities, they need to grow faster.
From acceptance to action (Spring 2011)
What is the way forward for Canadian plan sponsors? A four step plan sponsors can follow now to start transitioning to an LDI approach.
2. What goals should I be setting in this environment?
To achieve pension plan investment goals, investment risk should be spent wisely. LDI seeks to make the best use of any investment risk budget by focusing on the risks that are deemed most rewarded as well as those likely to help improve the plan's funded status, while simultaneously reducing unintended or unattractive risks. In short, risk measurement and management are the backbone of any liability-centric framework. The secret to a successful LDI approach is bringing together investment opportunities, costs, and risks—a tall task.
The Charter Portfolio (May 2010)
Charter Portfolio design starts with setting unique, relevant, and clear outcome-based investment goals to break away from the standard paradigm.
Better Bond Strategy (October 2009)
Many sponsors are setting goals focused on their required contributions. Discover a four-step plan that can help you manage your bond portfolio with cash contributions in mind.
Taking Credit Where Credit is Due (July 2009)
Should pension funds invest in corporate bonds?
3. What pitfalls should I avoid?
Not all LDI strategies are created equal. Plan sponsors should watch out for four potential shortcomings:
- Too often, LDI strategies may focus narrowly on matching a slice of the plans assets (typically, the fixed income assets) against a slice of the liabilities, which can under-represent both the opportunity set and the total risk. A total asset and liability assessment of risk and return should drive the focus of LDI.
- Don't confuse exposures and capital, since that can lead to suboptimal implementations. We prefer to consider exposures as the primary investment objective, and capital (i.e., the assets of the plan) as the means to support the exposures. The benefit is greater investment efficiency.
- "Set-and-forget" LDI strategies may fail to keep abreast of—and to readjust and react to — changing opportunities and needs. LDI is a long-term, evolutionary investment approach. An ongoing dialogue and partnership culture between a plan and its LDI manager can help keep that strategy on track.
- Beware of performance reporting that fails to adjust to reflect the LDI strategy. The flow of performance reporting and attribution should reflect the basic tenets of LDI — reporting should highlight areas of residual risk, to help focus on potential improvements.
The Greatest Interest Rate Call (March 2009)
Should plan sponsors implicitly assume the ability and authority to make large interest rate bets?
What is the Value of Your Pension Liability (April 2009)
Interest rate movements are the primary risk factor for pension plan members and fiduciaries.
Overcoming Credit Downgrades (April 2011)
Four approaches to managing downgrades of corporate bonds could have increased a pension plan’s funded ratio by 14% over the past 20 years.
4. How do I achieve my goals in a dynamic market environment?
Pension plans should have a clearly articulated goal (e.g., improve funding stats by x% over x time period). Once the plan vision is clear, oversight of pension plans should be sufficiently flexible to ensure timely reaction when necessary. Journey Management is a term we use to refer to investment strategies that focus on a goal, incorporate new information, and react in real-time to help achieve better outcomes.
Journey Management I (September 2009)
This introduction to Journey Management explores a dynamic approach, focused on achieving clearly defined outcomes.
Journey Management II (February 2010)
In this follow-up article, we elaborate on a framework for managing risk that is responsive to volatile market conditions, and we illustrate how to do this through a case study
Capital Efficiency Matters (March 2011)
How dual-beta strategies can help solve the low risk/high return challenge faced by many defined benefit plan sponsors.
Summer Pension Storm: Lessons learned (September 2011)
Pension plan surplus risk management needs to be improved. We suggest three strategies that can bring significant improvements without adding an undue amount of complexity or cost.
5. How do I get started?
BlackRock provides comprehensive LDI services. To learn more, contact your BlackRock Account Manager, or email the Canada and US LDI team
Client Case Study: From Deficit to Surplus (April 2009)
We illustrate how LDI turned around one corporate pension plan's Defined Benefits plan.
For more information about liability-driven investing, please contact us.
Important Notes: This information is for informational purposes only and should not be regarded as investment or other advice. The content of this webpage is meant for accredited investors in Canada, without regard to the specific investment objectives, financial situations or particular needs of any potential investor. The information is furnished to you with the express understanding that it does not constitute: (i) an offer, solicitation or recommendation to invest in a particular investment in any jurisdiction; (ii) a means by which any such investment may be offered or sold; or (iii) advice or an expression of our view as to whether a particular investment is appropriate for you and meets your financial objectives. This information is not a complete description of any of BlackRock's alternatives businesses or the products offered. Investors should carefully review the offering materials of each potential investment before making an investment decision. Further, as a condition to providing this information to you, you agree that we shall have no liability, direct or indirect, to you or any other person for any loss or damage, direct or indirect, arising from the use of this information.
Asset allocation and diversification does not assure profits or guarantee against losses.
Opinions expressed are as of October 2010 and are subject to change.
Free research and resources refers only to such information as is shared in this LDI site or otherwise provided but does not mean or imply that BlackRock's professional services are free. BlackRock's investment management, advisory or risk analytic services are not free. Fees and expenses apply to BlackRock investment management accounts and funds.