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Market Conditions May Impede Liability-Driven Investing

By Staff Writer | Updated on May 01, 2009

The extent of the damage inflicted on pension plans by last year’s stock market plunge suggests companies sponsoring defined-benefit (DB) plans will take defensive action. But one pension consulting firm warns that in the current environment, plan sponsors should be wary of implementing a popular approach to limiting a plan’s interest-rate risk, called liability-driven investing (LDI).

LDI strategies aim to match a pension plan’s assets more closely to its liabilities to avoid a mismatch that cuts into funding. One common way to do that is to put on an interest-rate swap that lengthens the duration of the plan’s assets to bring it closer to the duration of the liabilities.

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