Wilshire Consultant Finds Faults With LDI Approach

Dimitry Mindlin, managing director of Wilshire Associates, says liability driven investing fails to address the funding shortfall many defined benefit plans are experiencing.

Dimitry Mindlin, managing director of Wilshire Associates, says liability driven investing fails to address the funding shortfall many defined benefit plans are experiencing. Instead, he proposes commitment-driven investing, and plans to offer clients a unique method of coping with underfunding. CDI is a new framework based on risk management in which cost and risk are fundamentally connected, said Mindlin. He seeks to maximize security and minimize risk for pension plans. The key difference between CDI and LDI is that liability stands for a present value and plan sponsors seek to define this value before deciding what to do with it. Wilshire instead looks at what they want to do--price or fund--the commitment and then defines it based on demographics and the specific benefit package. In this case the actual cash flow promised to participants in the future is taken into consideration.

Mindlin recognizes that DB pensions are in decline. There were 112,000 active defined benefit plans in 1985 as opposed to 28,000 now, 9% of which are frozen. One of the problems with DB plans is the high cost of risk management. He is also not very excited about recent regulation changes; instead of helping they are causing plan sponsors to panic and to decide that managing and funding a DB plan is too onerous. He also explained that conventional risk management is inadequate because accounting reports are retroactive; pension plans are all about future expectations, whereas accounting is all about the past. Actuarial reports are based on poor scientific standards and bad discounting rates. And asset liability studies are not as useful as they should be.

“It’s not about risk elimination, it’s about risk management,” said Mindlin. The role of the portfolio policy, said Mindlin, is to maximize the likelihood that promised benefits will be paid.