Liability driven investing

December 2014

Trustees of pension plans have one goal: to ensure that all payments promised to plan beneficiaries can be made. A combination of regulations and accounting rules enacted over the past two decades has resulted in many pension plan sponsors either freezing their plans or moving in the direction of doing so. As part of this process, many plan sponsors have adopted an investment approach known as Liability Driven Investing.

Liability Driven Investing (“LDI”) attempts to match a defined benefit plan’s current assets to the present value of future liabilities. It is utilized mainly by “frozen” pension plans (those closed to new entrants and contributions) to reduce the volatility of future contributions to the pension plan.

This paper provides an overview of LDI, including an assessment of where and why it is used, how it can be implemented, and its benefits and disadvantages.