Liability Driven Investing to Achieve Better Pension Returns

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Is your pension using a liability driven investment strategy or are you playing the ‘high return’ game without knowing how to meet your current and future liabilities? Pension consultant John Cierzniak and analyst Julian Gibson will present an overview of how LDI works and provide plan sponsors and fiduciary committee members with a guide to implementing an LDI strategy.

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Liability Driven Investing to Achieve Better Pension Returns

  1. 1. Liability Driven Investing How to use LDI To Achieve Better Pension Returns Presented by John Cierzniak and Julian Gibson www.nyhart.comCopyright 2011. All Rights Reserved.
  2. 2. John CierzniakActuaryjohn.cierzniak@nyhart.com | (317) 845-3585Qualifications or certifications:Enrolled Actuary, Chartered Financial Analyst,Registered Investment Advisor Representative
  3. 3. Today’s Agenda 1. Overview of Liability Driven Investing 2. Pros & Cons of LDI 3. Examples of LDI in Use 3
  4. 4. What is LiabilityDriven Investing?
  5. 5. How does it compare to the traditionalinvestment approach?
  6. 6. Why would a pension want to shift strategies?
  7. 7. What is the rationale for LDI?
  8. 8. Market Dives =Cash Flow Crunch
  9. 9. Volatility on Liability Side
  10. 10. Wide Outcomes in Near Future
  11. 11. What is Duration?
  12. 12. Measuring Duration
  13. 13. Duration Segmentation
  14. 14. Duration Disparity
  15. 15. What is the Opportunity Cost of an LDI Strategy?
  16. 16. Underfunded orNearly Funded?
  17. 17. LDI Implementation Immediate or Phase-In?
  18. 18. How precise is an LDIstrategy?• If investment cash flows match the expected liabilities, will there be any error in the hedge? In practice, yes. - Tracking Error• A solution is to implement a derivative overlay, initially focused on interest rate risk before considering other hedges
  19. 19. Risk Management Using Derivatives
  20. 20. Let’s look at afew examples of LDI in action.
  21. 21. Option 1: Retain the current allocations to physical fixed income securities but increase the duration
  22. 22. Option 1: Retain the current allocations to physical fixed income securities but increase the duration
  23. 23. Option 2: Increase the allocation to physical fixed income securities.
  24. 24. Option 2: Increase the allocation to physical fixed income securities.
  25. 25. Option 3: Consider derivative positions to synthetically hedge interest rate exposure or increase the investment opportunity set
  26. 26. Option 3: Consider derivative positions to synthetically hedge interest rate exposure or increase the investment opportunity set
  27. 27. Summary: As assets increase thefunding status of the plan, LDI helps decrease long- term risk
  28. 28. Is LDI Right For You?Nyhart can help you conduct a comparison of a LDI vs. Traditional approach for your pension plan and conduct:• Liability Projections, Duration Calculation• Asset Allocation Design• Stochastic Forecasting• Asset / Liability Performance Tracking
  29. 29. This concludes our discussionANY QUESTIONS?
  30. 30. John CierzniakActuaryjohn.cierzniak@nyhart.com | (317) 845-3585Qualifications or certifications:Enrolled Actuary, Chartered FinancialAnalyst, Registered Investment AdvisorRepresentative
  31. 31. So Where is theLooking for more benefit Peak? presentations? Register for upcoming educational events on pensions, 401(k), healthcare and other actuarial and employee benefits topics at: www.nyhart.com/events/
  32. 32. ACTUARY &EMPLOYEE BENEFITS 16 Actuaries Consulting In 48 States. Nyhart is one of the nation’s largest independent actuarial and employee benefit firms, consulting to and administering the plans for clients with more than $14 billion in assets. Our team of benefit advisers deliver personalized analysis and recommendations, translating complex calculations and issues into common language that enables corporations, associations, churches and governments to effectively manage their retirement and health care benefits.
  33. 33. ACTUARY &EMPLOYEE BENEFITS Established in 1943, Nyhart is an ESOP with 84 employees and offices in Indianapolis, Chicago, Atlanta and Kansas City. Areas of Expertise Include: • Cash Balance Plan • Defined Benefit & Pension • Defined Contribution & 401(k) • Employee Stock Ownership Plan • Flexible Spending, HRA & HSA • Healthcare Actuarial Consulting Learn more at www.nyhart.com

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