DB Plan Sponsors Choosing LDI to Manage Risk

By Mike Bushnell • May 15, 2015 • 0 Comments
According to a recent Clear Path Analysis survey of high-level defined benefit plan representatives in the United States and Canada, a large majority of respondents said they would adjust their risk exposure if updated mortality tables increased their plan’s liabilities. However, at the moment, a small minority are actively implementing de-risking strategies, with those who are generally preferring liability-driven investing (LDI) over pension-risk transfers to third parties.

On the whole, private DB plan sponsors are confident in their knowledge of longevity risk trends, with 80% saying they have at least a high level of awareness of the impact they have on pension liabilities. In addition, just 10% of the respondents said they would take no action if their plan’s liabilities increased due to updated mortality tables.

With many firms at least considering some risk-exposure modification, a small number of respondents actually said they were likely to make those changes this year; those who are tend to strongly prefer LDIs. Almost no plan sponsors said they would transfer DB risk to a third-party insurer in 2015, while 18% reported they were very likely to “utilize or increase the usage of LDI strategies.”

Just 23% of those surveyed said they were “not at all likely” to turn towards LDI strategies, compared to 71% who said they would not consider using PRTs. Of those who have utilized LDI strategies, 61% said they were either somewhat or very successful in reducing pension volatility. In addition, a plurality (46%) at least partially agreed with the statement that “transferring DB risk to an insurer is too expensive.”

A relatively large number of plan sponsors are not ruling out lump-sum solutions either, with 41% saying they were in the process of, or are considering, implementing a lump-sum program in 2015, compared to 47% who said it was “not at all likely.” Almost one in four respondents (22%) said they definitely turn to a lump-sum program if plan liabilities increased.

“Escalating longevity, ongoing market volatility, unpredictable funding requirements and asset/liability mismatch are all contributing to significant risk over the long term,” wrote Rohit Mathur, Prudential Retirement's senior vice president of global product and market solutions, who authored the summary attached to the report.