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Liability Driven Investing (LDI) Solutions

Focusing on increased predictability and reduced volatility for defined benefit plan sponsors


Corporate defined benefit plans not only have to weigh decisions in the context of asset selection, they also must understand how movements in plan liabilities could impact their ability to pay future obligations. Liability Driven Investing (LDI) defines and identifies solutions aimed to reduce risks relative to pension liabilities, and this focus has led it to be recognized as a best practice for defined benefit pension plan sponsors. Our professionals specialize in designing and delivering customized LDI solutions to pension plans by acting as objectives-based investors. We seek to reduce funded status volatility and shape funded status outcomes. As a result of a collaborative approach where we partner with plan sponsors and their advisors to understand strategic plan objectives and constraints, we are able to design and construct LDI solutions tailored to each client's specific situation.

An LDI implementation journey

With a long-standing tradition of designing LDI solutions for plan sponsors, we see LDI implementation as a journey, starting with simpler programs that better align assets with the plan’s liability profile, then moving to more customized and refined approaches over time. These custom investment strategies often involve converting plan liabilities into a custom liability benchmark, offering various benefits.

Improved governance - Supports reporting and monitoring framework

Aims to reduce risks - Transfers accountability of duration/curve risks

Complements de-risking strategy - Framework that supports glidepath evolution

Seeks to decrease volatility - Potential for funded status volatility reduction

A customized LDI solution

Adopting an LDI strategy can be quite effective at achieving plan sponsor risk reduction goals. However, there is no “one size fits all” solution for investors seeking to align plan assets more closely to their liabilities. At LGIM America, our first step in any engagement is to better understand the plan sponsor’s situation. Consistent with our client-led framework, we advocate letting the unique plan details dictate to us how the investment strategy should be designed. Because the actual implementation of each plan sponsor’s liability driven investing strategy varies considerably, we offer a range of capabilities that can be tailored to each situation.

Completion Management

While accounting for external benchmark exposures, a completion portfolio is designed to match the target hedge ratio across the curve

Liability Sleeve

Involves structuring a portion of the fixed income portfolio to hedge a slice of the liability

LDI Pooled Funds

Structures that can be blended together to efficiently hedge interest rate and credit spread risk


Offers a wider investment toolkit to target additional alpha within the Treasury allocation

A sound LDI investment philosophy

By understanding the plan’s unique situation and characteristics (plan liabilities, asset allocation, funded level, etc.), we strive to design an LDI solution to achieve the plan’s hedging objectives, complementing the overall investment strategy. Our engagement always begins by understanding the plan’s unique liabilities and characteristics which informs us of the appropriate investment solution for the plan’s situation. This will often include reviewing the current glidepath, if one exists, as well as provide recommendations on ways to appropriately align the plan’s fixed income allocation more closely to the liability in an effort to reduce funded status volatility and target the plan’s investment objectives.

We advocate for sizing the credit allocation within a total portfolio context, with considerations given to 1) the return seeking asset allocation, and 2) the credit quality of the liability discount basis. Depending on the plan’s situation, we outline the different approaches to hedging interest rate risk, ranging from implementing a blunt hedging approach via a STRIPS portfolio to tailoring the Treasury allocation much more closely to the duration profile of the liabilities.

It is also important to address the benefits and considerations of using Treasury derivatives within the strategy for risk management purposes. For some plans targeting a more holistic solution, a custom credit component that allows for a better cash flow match to the liabilities can be explored.

Benefits of partnering with us

We believe we have the global strength, together with a skilled and agile local presence, to skillfully deliver customized solutions.

As a custom LDI provider, we aim to utilize our expertise in order to partner with plans of all sizes, seeking to ultimately mitigate funded status volatility and positively shape funded status outcomes.

We offer a variety of LDI-focused services, including custom LDI solutions (including custom market-based benchmarks), completion management and derivative implementations for pension clients.

We have adopted a true partnership approach, including these additional services as part of our LDI relationships: asset-liability modeling, collaborative partnership, custom reporting package and funded status monitoring.

LDI award

2022 CIO Industry Innovation Award - LDI

CIO has selected LGIM America as the 2022 Industry Innovation Award winner for Liability Driven Investing (LDI). The CIO awards centered on allocators driving change and enhancing institutional fund performance and the service providers driving innovation in institutional investing.1

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1. Chief Investment Officer, 2022, Asset Management & Service Providers survey. Nominees are anonymously submitted by their peers across the industry. Finalists and winners are chosen from the nominee pool by the CIO editorial team in conjunction with an advisory board of former and current CIOS. LGIMA did not compensate CIO for its award. This award does not imply that LGIMA will or has been successful in its product offerings or services.

The material provided is for informational purposes and is not intended as a solicitation to buy or sell any securities or other financial instruments or to provide any investment advice or service. The information contained in this presentation, including, without limitation, forward looking statements, portfolio construction and parameters, markets and instruments traded, and strategies employed, reflects LGIMA’s views as of the date hereof and may be changed in response to LGIMA’s perception of changing market conditions, or otherwise, without further notice to you.

Accordingly, the information herein should not be relied on in making any investment decision, as an investment always carries with it the risk of loss and the vulnerability to changing economic, market or political conditions, including but not limited to changes in interest rates, issuer, credit and inflation risk, foreign exchange rates, securities prices, market indexes, operational or financial conditions of companies or other factors. Past performance should not be taken as an indication or guarantee of future performance and no representation, express or implied, is made regarding future performance or that LGIMA’s investment or risk management process will be successful.

In certain strategies, LGIMA might utilize derivative securities which inherently include a higher risk than other investments strategies. Investors should consider these risks with the understanding that the strategy may not be successful and work in all market conditions. Reference to an index does not imply that an LGIMA portfolio will achieve returns, volatility or other results similar to the index. You cannot invest directly in an index, therefore, the composition of a benchmark index may not reflect the manner in which an LGIMA portfolio is constructed in relation to expected or achieved returns, investment holdings, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility, or tracking error targets, all of which are subject to change over time.

Unless otherwise stated, references herein to “LGIM”, “we” and “us” are meant to capture the global conglomerate that includes Legal & General Investment Management Ltd. (a U.K. FCA authorized adviser), LGIM International Limited (a U.S. SEC registered investment adviser and U.K. FCA authorized adviser), Legal & General Investment Management America, Inc. (a U.S. SEC registered investment adviser) and Legal & General Investment Management Asia Limited (a Hong Kong SFC registered adviser). The LGIM Stewardship Team acts on behalf of all such locally authorized entities.