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LDI Solutions.

We partner with plan sponsors and their advisors to develop, structure, and implement customized LDI solutions to meet plan de-risking objectives and manage funded status outcomes. Our strategies seek to minimize volatility due to the key drivers of pension funded status risk: changes in interest rates, credit spreads, and equities.

LGIMA’s LDI Solutions set has evolved to meet changing plan objectives and market conditions. 


Level 1 LDI: Market benchmarks

Level 1 LDI implementation constructs the Liability Hedging Asset (“LHA”) component using traditional fixed income market benchmarks.  Establishing the appropriate market-based benchmarks and the strategic mix between credit and Treasuries should be done within a total portfolio context, incorporating the allocation to the Return Seeking Asset (“RSA”) component.  Level 1 LDI can be implemented via standalone market-based benchmarks (Level 1a) or via a custom blend of market-based benchmarks (Level 1b).

We discuss our Level 1 LDI process at length here .

Level 2 LDI: Liability benchmarking and derivative overlays

Level 2 LDI implementation provides a higher level of customization to meet the specific de-risking objectives of the plan, incorporating explicit liability benchmarking (Level 2a) and/or derivative overlays (Level 2b). LGIMA has made the significant investments in personnel and systems necessary to provide best in class Level 2 LDI solutions.  

In a liability benchmarking framework, the manager is measured against a custom benchmark based on the actual plan liabilities, incorporating the plan’s specific liability cash flows and discount rate methodology. Liability benchmarking can be implemented on the full plan or a carved out sleeve of liabilities. LGIMA can also manage aggregate plan exposure via a completion management framework, under which we would incorporate external manager exposures. Ultimately, explicit liability benchmarking lowers funded status volatility, mitigates unintentional duration and curve bets, and leads to better governance and manager accountability.  

We discuss our liability benchmarking process at length here  

For Level 2b implementations, LGIMA provides the full derivative toolkit to shape funded status outcomes across equity, interest rate, and credit spread exposures. Derivative strategies should be structured to both meet strategic plan de-risking objectives and capture market opportunities and dislocations.  LGIMA has implemented a number of derivative strategies to optimize plan return profiles to benefit from natural pension asymmetry.  

Please click the links below to learn more about some of our derivative strategies for pensions:

Stock replacement strategy for pension plans: utilizing calls to replicate physical equities (PDF: 201KB)  

1x2 call spread overlays - increasing at the money equity upside at expense of distant unneeded upside (PDF: 169KB)  

Selling rate upside to hedge equity downside 

Level 3 LDI: End-game solutions

Level 3 LDI implementation incorporates end-game solutions for closed and/or frozen plans. For plans looking to retain the assets and liabilities in a runoff framework, LGIMA can structure and manage an immunization portfolio to mitigate plan sponsor exposures. LGIMA also offers annuity aware solutions for plans targeting an annuity buyout. LGIMA can manage asset portfolios to annuity buyout pricing levels or in preparation for an in-kind transfer to minimize transaction costs.   

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