The New Era of Liability-Driven Investing

Defined benefit (DB) pension plans have long relied on liability-driven investing (LDI) to manage risk and align assets with liabilities. As the landscape of DB pension plans continues to evolve, we are entering a new era: LDI 3.0. 

LDI 3.0 builds on the evolution of the strategy over the past two decades. In the early stages, plan sponsors opted to simply extend the duration of their fixed income using longer duration market-based benchmarks. In the US, the next phase of LDI involved a more customized approach to credit and Treasury strategies to better align with the liability risk profile, most commonly involving a long credit allocation and a custom Treasury portfolio to hedge interest rate risk. 

As funding ratios for corporate DB plans have improved in recent years, many DB plans are fully funded or in surplus, with fixed income the dominant class within their asset allocations. As corporate DB plans mature and fixed income allocations grow, plan sponsors have more flexibility to improve diversification and potentially seek more yield while still meeting their hedging objectives. 

Enter LDI 3.0, which involves broadening the fixed income toolkit beyond traditional investments to potentially enhance yield and improve diversification. It comes as more companies are planning to keep their overfunded plans compared to prior years amid growing recognition of the opportunities that exist from managing the plan in run-off mode. Indeed, according to a Mercer survey in June, 50% of US plan sponsors do not intend to terminate their DB plans in 2025, up from 36.7% in 2023.

LDI 3.0 takes its inspiration from how insurers structure their investments to balance preservation and growth objectives, widening the LDI investment toolkit to include:

• Short duration fixed income to enhance collateral efficiency and optimize liquidity and yield objectives
• Opportunistic fixed income to improve diversification and unlock uncorrelated sources of return potential
• Securitized assets for potential spread pick-up while maintaining high credit quality
• Investment grade private credit to gain yield potential and diversification

To be sure, there is no one-size-fits-all solution. Circumstances matter, and we think LDI programs should be considered from a holistic point of view. However, as Figure 1 shows, we find that the enhanced fixed income portfolios that characterize LDI 3.0 can potentially lead to enhanced yields and improved funded status outcomes while also lowering drawdown exposure. 

The bottom line: LDI has long sought to minimize volatility and improve funded status outcomes. As DB plans continue to evolve and mature, so should the LDI strategy.

Figure 1: The potential yield pick-up of enhanced LDI

Source: L&G – Asset Management, America and Bloomberg. Data as of September 30, 2025. Traditional LDI represents a portfolio of 50% long credit, 30% intermediate credit and 20% custom Treasury. Enhanced LDI represents a portfolio of 40% long credit, 10% intermediate credit, 30% investment grade private credit, 10% custom Treasury and 10% opportunistic fixed income.

Disclosures

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