Reduce pension risk and avoid the funding level roller coaster

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Ready to make your pension plan boring again?

Many defined benefit (DB) pension plan sponsors have pursued excess returns in their plans by making bets on equity markets and interest rates. The issue? Most fail to accurately predict market movements and funding levels have been behaving like a roller coaster.

LDI: Making pensions boring again compares three different investment strategies – traditional, passive LDI, and custom LDI – to see how they impacted funding levels for a typical pension plan since January 1, 2010. The time period coincided with one of the strongest equity markets in recent history – and the results may surprise you.

Our analysis shows that a custom LDI strategy did the best job of avoiding the funding level roller coaster that we experienced in the past eight years. We also found that it provided other benefits, including:

  • Little opportunity cost in funding levels – there was little opportunity cost, as measured by funding level, to being in a custom LDI strategy as it ended up in almost the same place as the traditional strategy – and without the cash and accounting surprises.
  • Potential for excess returns – a custom LDI strategy can add private assets, smart credit and overlays to enhance yield – investment strategies that have been used by insurers for decades.
  • A smooth return to full funded status – LDI strategies can help plans get to a fully-funded level, locking in excess returns while reducing the chances of a slide backwards.

"Making bets on the equity market and on interest rates is a high-risk strategy, especially for plans close to or at fully funded levels," said Brent Simmons, Senior Managing Director & Head, Defined Benefit Solutions, Sun Life Financial. "Being boring is a better approach for DB pension plans – embrace a custom LDI strategy that gets you off the roller coaster."