Credit Union CFO Focus: Liability-driven investing

This strategy can reduce pension plan volatility

Liability-driven investing (LDI) is a strategy employers use to reduce variations in the surplus of their pension plans and required employer contributions.

Almost a third (32 percent) of corporate pension plan sponsors are in the process of implementing or have implemented an LDI strategy, while another 18 percent are very likely to implement an LDI strategy, according to Clear Path Analysis’ report Pension Plan De-risking, North America 2015.

However, LDI is not as prevalent in the credit union space as in the corporate pension world. By following the corporate pension world’s lead, credit unions can reduce the volatility in their defined benefit plan.

Surplus is the difference between the assets and liabilities in an employer’s pension plan. For example, if a pension plan has assets of $1 million and liabilities of $800,000, it has a surplus of $200,000. The goal of a liability-driven investing strategy is to reduce the volatility or variation of a plan’s surplus and, consequently, improve the predictability of pension expense and required employer contributions.

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