Welcome to the Next Wave of LDI Evolution
As the landscape of defined benefit (DB) pension plans continues to evolve, we are entering the next wave of liability driven investing (LDI), which we call “LDI 3.0.”
When LDI was initially recognized as best practice investing for DB plans, sponsors opted to simply extend the duration of their fixed income using longer duration market-based benchmarks. The next phase of LDI involved a more customized approach to Treasury and credit strategies to better align with liability risk profiles. These traditional LDI strategies often consist of a long credit allocation and a custom Treasury portfolio that completes the interest rate hedge target.
Now, as steadily improving funding ratios are leading many LDI clients to increase their fixed income allocations, the next phase of LDI evolution focuses on broadening fixed income portfolios beyond traditional investments. We find that expanding the fixed income toolkit can allow plans that are increasingly fully funded or in a surplus position to maintain their hedging and funded status volatility objectives while incrementally improving returns.
Examples of the enhanced LDI fixed income investment toolkit include:
Intermediate Credit
Securitized Assets
Investment Grade Private Credit
Short Duration Fixed Income
How L&G can help
To fully integrate these diversifying exposures within the LDI solution, it may be beneficial to employ a manager who plays a “quarterback” role, overseeing the LDI program from a holistic point of view. At L&G, we are uniquely positioned to support the transition toward LDI 3.0. Our approach is grounded in deep expertise and innovation, offering:
Custom LDI Solutions
Tailored strategies that align with a plan’s specific liability profile, including completion management and derivative implementations
Endgame Capabilities
Custom Buy & Maintain and cash flow-matching strategies geared toward funded status preservation and liquidity
Partnership-Like Approach
High-touch client engagement that offers custom reporting, actuarial expertise and proprietary asset-liability tools to help our clients make informed decision
Proprietary Analytics
Platform tailored for LDI risk management, supported by a global team of experts, that allows us to customize investment solutions to clients’ objectives1
Learn more about our capabilities related to LDI 3.0
Liability Driven Investing (LDI)
Focusing on increased predictability and reduced volatility for defined benefit plan sponsors
Active Fixed Income
Navigating opportunities across increasingly complex markets
Read our insights
The Next Wave of LDI Evolution
Since LDI was recognized as a best practice for defined benefit plans, sponsors have evolved their investment strategies. Initially, they extended the duration of fixed income using longer duration benchmarks. The next phase focused on customizing Treasury and credit strategies to align with liability risk. Now, we are entering a new phase that asks, “How can we diversify our growing fixed income allocation?”
Staying Afloat: A Framework for Public Pensions Navigating a Liquidity Squeeze
Managing public pension plans in turbulent markets can be a challenge, especially when funding levels and cash flow pressures dictate tough decisions. In this piece, we introduce an investment framework to help with navigating a liquidity squeeze.
1. LGIMA leverages the business model and resources of the other subsidiaries within the L&G – Asset Management, Ltd. global conglomerate, including Legal & General Investment Management, Limited for investment research, Stewardship and certain back office, compliance and risk management functions and the Global Trading Team through various shared services, personnel sharing and “participating affiliated” arrangements.
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