Pension Plans Weighing De-Risking Options

“From this statistic one might infer that these pension professionals assume they are hedging risk with a small percentage of fixed income investments, but in actuality may not be implementing a true LDI strategy, as no significant duration matching is occurring,” Glenn O’Brien, managing director and head of U.S. distribution for pension risk transfer at Prudential Financial, wrote for the report.

Another indication that LDI strategies are not well understood is that they are significantly more common among small plans. “Is a homogenous definition of LDI being applied across the board, or are the strategies varying?” the paper asked.

Over the next five years, closed plans and small plans anticipate allocating more toward fixed income, the survey found. Large plans and open plans showed more interest in real assets and alternatives. Private and public plans were split. Private plans expect a transition toward real assets, while public plans favored alternatives.

“Plan sponsors are starting to realize that de-risking can be less expensive than keeping the liabilities on their balance sheets, and transferring pension risk allows companies to focus on the day-to-day running of the business,” O’Brien said in a statement accompanying the report. “As such, we’re now seeing a transition to real assets for these private plans, whereas public plans are anticipating a reallocation to alternatives.”