A liability driven investment is a type of strategy designed to generate enough income to cover a specific liability or expense in the future. This approach has been gaining popularity among pension funds and institutional investors looking to better manage their risk exposure and ensure they have adequate funds to meet their obligations. By aligning their investment portfolios with their liabilities, these investors aim to reduce the impact of market volatility and interest rate fluctuations on their financial health.
The 2023 Chief Investment Officer Liability-Driven Investment Survey combines results from two surveys—one of public and corporate defined benefit pension plans and the other of insurance companies. The survey reveals that more than half of respondents are currently implementing some form of liability driven investment strategy, with many citing the desire to better match assets with liabilities as the primary reason for adopting this approach.
Former Golub Senior Fellow, Laura Kodres, discusses the similarities between what happened with British pension funds in autumn 2022 and the challenges facing pension funds today. She highlights the importance of effective risk management and the need for pension funds to adapt their investment strategies to changing market conditions.
Many corporate pension fund leaders are re-evaluating their liability-driven managers and allocations. As they seek to enhance their risk management practices and improve the overall sustainability of their pension funds, these leaders are exploring new opportunities for diversification and seeking out innovative investment solutions.
Vulnerabilities in private equity are worrying the Bank of England's Financial Policy Committee, warning that while the sector has proven to be resilient in the face of economic challenges, there are concerns about the potential impact of rising interest rates and market volatility on these investments. As a result, investors are increasingly turning to liability-driven investment strategies to mitigate these risk.
Enpam, Italy's largest pension scheme with €25.9bn in total assets, is set to complete the transition to a new liability-driven investment approach. By adopting this strategy, Enpam aims to better align its investment portfolio with its long-term liabilities, ensuring greater stability and security for its members' retirement savings.
Inflation Outlook – Sticky Wages? As we head into the last data and rate decisions of 2023, with the Federal Reserve (Fed), European Central Bank (ECB), and Bank of England all set to announce their latest monetary policy decisions, investors are closely monitoring the impact of inflation on their portfolios. The potential for sticky wages and rising prices presents challenges for liability-driven investors seeking to generate sufficient income to cover future liabilities.
A change of practice from two asset managers promises to help pension funds weather a repeat of the UK's gilt crisis in 2022. By adopting a more flexible and dynamic approach to managing their fixed income investments, these asset managers are helping pension funds better navigate changing market conditions and mitigate the impact of interest rate fluctuations on their portfolios.
