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Alternative Market Briefing

Pension Fund Perils: Why conventional pairing of LDI with De-risking Glide Paths produces inferior outcomes

Monday, February 13, 2017

Matthias Knab, Opalesque:

Michael Ashton, Managing Principal of Enduring Investments, writes on Harvest Exchange:

Combined use of traditional Liability Driven Investment (LDI) and funded status responsive de-risking strategies should be decoupled or rebuilt. Embedded inconsistencies in the treatment of risks in these two elements of what has become a popular pension strategy cause irreconcilable conflicts in their execution and imperils the positive pension fund outcome.

This article provides a critique of the combined LDI / De-risking Glide Path strategy as currently implemented by many pension plan managers and also provides an example of an alternative solution that better improves pension plan outcomes.

Approaches to pension risk management have passed though many phases over the past 40+ years. Higher rate environments of the 1980s made liability immunization programs with treasuries very attractive, but traditional 60/40 or balanced fund strategies persisted as the dominant strategy for pensions. As rates began their secular decline, funding levels continued to deteriorate and while liability-driven investing became popular again in the beginning of the new millennium, significant levels of underfunding prevented most pensions from fully matching their assets and l......................

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