Liability Driven Investing
Liability Driven Investing (LDI) can reduce the volatility in cash contributions and financial statements generated from a plan sponsor’s defined benefit pension plan. This is achieved by aligning asset returns to changes in the value of pension liabilities.
McLean Budden offers LDI solutions through our accomplished team of in-house LDI experts. We have custom-built systems and processes to analyze pension risk, staff an internal credit research team, and can offer derivative management if necessary.
Now is the right time to consider LDI if reducing financial statement volatility or cash contribution volatility is a top priority for your organization.
McLean Budden’s unique LDI process has four key steps:
- Risk Analysis: Identify and quantify the existing risks within a pension plan.
- Risk Budgeting: Shift the focus from asset allocation to risk allocation.
- Optimization: First – “De-risking” – create an investment strategy that is aligned with the desired risk budget target and, in the process, a benchmark portfolio; Second – “Re-risking” – create an investment strategy to outperform the benchmark portfolio, which remains within the target risk budget.
- Monitoring: Quarterly review of the investment strategy versus the benchmark portfolio; Adjust the investment strategy and benchmark portfolio as the liability profile changes; Review of counterparty risk, if derivatives are included in the investment strategy.
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