The use of liability-driven investment strategies as a way for pension schemes to reduce volatility and improve their funding status has become less widespread over the past year, according to a survey published by SEI.
The investment firm's latest annual Global liability driven investment poll found that 57% of the 125 corporate pension schemes questioned worldwide were using the approach, which is focused on gaining sufficient assets to meet all current and future liabilities. This compares with 63% in the same survey last year.
SEI said the fall 'could be a result of global interest rates and the average funded status of plans remaining at historic lows in 2012'.
The report added: 'LDI strategies could surrender potential returns in equity markets, thus locking in current funding levels, which might be unacceptably low for many pension sponsors.'
The firm noted, however, that 20% of organisations currently not using a liability driven investment strategy planned to do so by the end of 2013. Of those currently using one, more than half (52%) have invested more than 40% of their portfolio in an LDI strategy and only 11% invest less than 20%.
LDI strategies are particularly popular in the US, the survey found, with 67% of those questioned using the approach.
While respondents gave several definitions for what an LDI strategy involves, the vast majority (69%) said it was either 'matching duration of assets to duration of liabilities' or 'a portfolio designed to be risk managed with respect to liabilities'.
Jonathan Waite, director of investment management advice and chief actuary of SEI's institutional group, also highlighted the increased complexity of the LDI strategies used by schemes.
'An LDI strategy should begin with a comprehensive asset/liability study that incorporates the organisation's as well as the plan's unique risk tolerances.
'Implementing active LDI strategies such as using an overlay of strips and swaps can produce a more precise duration match than funds alone. Continuous active management and monitoring of LDI implementation is critical as the plan moves along the glide path.'
