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Overview

Columbia Liability Driven Investing (LDI) offers a customized fixed income solution designed to manage the volatility of a pension plan's funded status around the key drivers of funded status risk: interest rates and credit spreads. A team of experienced investment professionals, actuaries and portfolio analysts offer clients de-risking strategies designed to their specific plan goals and risk profile. Our flexible investment framework embraces the ongoing needs of each plan from the discovery to the implementation phase. The team uses the firm's full investment resources of credit analysts, strategists and traders.

  • Our LDI solutions team partners with clients and their advisors to help them manage risk and reach their pension goals.
  • The experienced team utilizes a pension risk management framework to analyze plan characteristics and design a customized solution to manage the relative volatility of assets and liabilities.
  • The emphasis on customized LDI solutions benefits the plan sponsor and the plan participants through custom benchmarks, investment management, glide path creation, contribution strategies and plan termination.

LDI Investment Solutions Process and Philosophy

Our investment approach seeks to design a solution that best fits the client's plan goals and risk tolerances. Our process allows the profile of the liabilities and the sponsor's goals to drive the fixed income investment strategy. Within this framework, we seek to reduce volatility in the movement of the funding portfolio relative to the liabilities; and where appropriate to add alpha to investment returns without introducing unwarranted volatility.

As part of the designed solution, we create a Custom Liability Benchmark and employ duration matched fixed income strategies with the goal of achieving returns and managing volatility to meet the obligations of a retirement plan or immunize a distinct cash flow stream. In addition, our actuary works very closely with our investment professionals to tailor an investment solution that matches the demographics of the covered population.

LDI Solutions philosophy and process
LDI Solutions philosophy and process
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An effective LDI strategy requires partnering with plan sponsors and their advisors to develop customized risk management solutions. Our process consists of four elements:

A) Discovery

Through an information gathering process involving historical and current plan characteristics we better understand client goals and risk budget. This assessment of plan liabilities assists in quantifying client risks and objectives and the creation of a customized investment policy statement.

B) Design

A customized client solution begins with stochastic asset liability modelling to identify potential asset allocation strategies that seek to optimize risk-adjusted returns by:

  • Lowering funded status volatility
  • Minimizing contributions needs
  • Optimizing plan expense

C) Implementation

Driven by the plan sponsor's adoption of a new investment policy statement, portfolio construction utilizes proprietary research and analytic methods to apply quantitative and fundamental approaches to relative value. Fundamentals, valuation and market technical are key factors in determining sector weights and duration/curve exposure.

D) Ongoing review

We partner with our clients to pursue client objectives through ongoing monitoring of funded levels versus goals and glide path. Funded status and investment performance reconciliation are customized to client needs. An annual review process re-optimizes a portfolio through ongoing discovery, design and implementation.

Custom Liability Benchmark 

A key success factor in any LDI de-risking strategy is designing a customized liability benchmark (CLB) to replicate the behavior of the liability for changes in interest rates with the goal of reducing the volatility of the funded status.

The CLB is a market-based benchmark and serves as proxy for the liability. It is the basis for investing the plan's duration-matched fixed-income (DMFI) assets and serves as the LDI asset performance measurement.

The CLB is tailored to the specific risk and return objectives of the plan sponsor. It will be optimized relative to cash flows for duration fit and yield. The typical CLB is a balance between corporate debt and Treasury bonds and can be either duration matched or dollar duration matched.

There is no guarantee that an LDI strategy will achieve these objectives or that return, volatility, and funded status expectations will be met.