The U.S. is lagging behind Europe in implementing liability-driven investing (LDI), but regulatory changes “have injected a new sense of urgency” to catch up, according to a study by Northern Trust Global Advisors and Greenwich Associates. “The greatest increase [in LDI] will be in the U.S., due to the change in the pension plan law in August 2006 and the change in the accounting rules in September 2006,” explained Duane Rocheleau, head of the investment solutions team at Northern Trust.
Of the 224 plan sponsors surveyed in the U.K. and 217 in Europe, 11% and 12%, respectively, have implemented LDI. No more than 3% of the 1,051 U.S. plan sponsors surveyed are using LDI. The U.K. is further ahead because its accounting rules changed a few years before the U.S., said Rocheleau.
Among those U.S. pension plans that employ LDI, the majority use active portfolio managers (56%), while less use investment banks (19%). Plan sponsors should seek LDI providers that have solutions advisory teams and dedicated client implementation and servicing teams, said Rocheleau. “The firms that received the highest number of mentions were those with solutions, customized strategies and implementation assistance.” Lori Crosley, consultant at Greenwich Associates, added that successful managers usually “have dedicated pension plan consulting teams that are able to look at both the assets as well as the plan liabilities and provide holistic advice.”
Restrictions on the use of derivatives or swaps are barriers to implementation. Some plan sponsors (20%) are hesitant due to their lack of understanding about what LDI is and how to implement it. The most commonly-used LDI strategies involved immunized interest-rate risk with duration matching and alpha targets.