Liability-driven investing has made great strides toward its goal of lowering the risk for corporate defined benefit plans. With the advent of under-funded pension programs, LDI has emerged as the most widely used antidote. The idea is that, by de-risking portfolios, plan managers can prevent any further erosion of their assets’ value and at the same time inch back to the fully funded level (their ability to match obligations to participants). And it looks as if many are pulling off this neat trick. LDI typically tilts portfolios toward asset classes that are perceived to be “safer”—like bonds, and away from stocks..

Last year, fixed income composed 43% of plan assets, compared to 30% for stocks. In 2014, the two asset classes were even, with 39% each. The rest of the pie goes to alternatives, ranging from private equity to commodities to real estate. This area has risen to 27% from 22% in four years, according to Conning’s Annual Corporate Pension Review.

As of July, 88% of S&P 500 company plans used LDI, concludes a survey by Goldman Sachs Asset Management. And here’s some more good news: plans’ funded level has improved. In 2019’s first half, companies adopting LDI boosted funded status by 2.1%, while those depending on more traditional methods had a 0.3% decline, according to a study by asset manager Insight Investment, the world’s largest LDI manager.

While company plans don’t employ LDI for their entire portfolio, the amount covered stood at an average 49% last year, CIO’s LDI poll shows. Often, plans will hire outside managers to oversee LDI solutions.

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