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Liability-Driven Investing

A tailored approach for various stages of de-risking 

Liability-driven investing, or LDI, is a portfolio strategy designed to help pension plans reduce funded status volatility. Aegon AM collaborates with plan sponsors and consultants to propose solutions that align with the plan's current funded status level, plan status and investor beliefs.  

 

Pooled funds and separate account solutions 

Depending on a plan’s size, customized LDI solutions are constructed through a pooled funds structure or a customized separate account. The pooled funds approach provides an easy-to-implement solution designed to match a plan’s duration and asset cash flow requirements. Aegon AM’s pooled funds expand the investable universe beyond government and credit sectors, providing the potential for increased diversification while searching for attractive relative-value opportunities across the yield curve. 

 

For separate account solutions, a customized investment strategy is constructed to suit a plan’s desired return goal and risk tolerance. Using the full array of fixed income sectors, we create a unique investment strategy designed to match a plan’s duration, key rate duration and cash flow requirements. 

Investment options – a phased approach

Based on a plan's current funding level, plan status, investor beliefs and overall plan objective, the following investment options could be considered.

  

  PHASE 1:
DURATION-MATCHING SOLUTION		 PHASE 2:
KEY RATE DURATION-MATCHING SOLUTION		 PHASE 3:
CASH FLOW-MATCHING SOLUTION
Investment objective Increase interest rate hedge ratio and retain allocation to return-seeking assets Improve key rate duration hedge and increase allocation to liability-hedging assets Further improve key rate duration hedge and credit hedge spread ratio, and minimize funded status volatility
Typical plan status Open or closed/frozen plan with higher proportion of active participants Open or closed/frozen plan with higher proportion of terminated vested participants and retirees Hibernated plan with high proportion of terminated vested participants and retirees; no plans to pursue PRT
Typical funded status Poorly funded (60% - 80%) Better funded (80% - 95%) Well funded (95% - 110%)
Proposed investment strategy Reallocate traditional fixed income investments to Treasury STRIPs and intermediate/long duration credit Reallocate portion of return-seeking assets to fixed income portfolio and incorporate more diversified assets across the credit quality and maturity spectrum Customize portfolio by matching liability cash flows with expected maturities of
liability-hedging assets
Potential investments

• US Treasury strips

• Long Credit (investment grade corporates and structured finance)

 Add:
  • Intermediate Credit (investment grade corporates and structured finance)
  • High yield corporates
  • Emerging markets debt
 Add:
  • Commercial mortgage loans
  • Private placements