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Liability-driven investment strategies can be surprisingly simple


May 11, 2018

Liability-driven investing can be an efficient total portfolio solution

Our 15-plus years of managing liability-driven investment (LDI) programs for U.S. corporate defined benefit (DB) plans have taught us some major lessons:

  • Highly effective LDI approaches can be surprisingly simple.
  • Success requires a partnership between the consulting actuary and the investment team.
  • LDI programs are individualized to client objectives and risk posture.
  • LDI is not an allocation but a total portfolio paradigm.

LDI in the United States

Currently, LDI is both complex and fraught with competing, or even incompatible, objectives. We believe high fees for complex strategies are mistaken as “sophisticated cure-alls.” The reality is that regardless of your investment strategy’s complexity, if you have not had adequate interest rate exposure to combat a consistently declining rate environment, your plan’s funded status has probably suffered, and your deficit is larger than planned, even with record equity market levels.

How can plan sponsors contemplate liability hedging if costs are prohibitive and results are muted? Many can’t. But we have found that liability hedging should be neither onerous nor expensive. We believe we have found an achievable and effective path to building a robust liability-driven framework in a total portfolio solution. It brings to bear a philosophy and process that focuses on the client, emphasizes a fluid information flow between the consulting actuary and investment fiduciary, and seeks to minimize costs. Click the download button at the top or bottom to learn more.

Figure 3. Potential benefits of capital efficiency and focused hedging

For illustrative purposes only

Infographic showing 10 year expected return, value at risk, and hedge ratio between a typical portfolio vs a capital-efficient hedge
Typical Capital efficient
10-year expected return (annualized, net of fees) 5.1% 5.6%
Value at risk ("worst case" funded status change) ($47.7M) ($29.0M)
Hedge ratio % 43% 53%

Source: Willis Towers Watson March 2018 Capital Market Assumptions

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