Liability Driven Investing 

Philosophy

We believe each client’s liabilities and objectives are unique and require a customized process.
  • A partnership with the client, the client's actuaries and accountants, and PNC Capital Advisors is needed to be successful in this approach 
  • We work closely with each client to develop a customized long-term solution based on each client’s unique risk and return objectives, guidelines and constraints 
  • We work diligently to optimize and actively manage the portfolio based on that profile 

Process

Benchmark: Custom, based upon the client’s specific liability cash flows

The primary goal of the Liability Driven Investing framework is to manage pension portfolios not from the asset-only perspective, but based on pension liabilities. As a result, LDI strategies are designed to control pension plan risk defined as volatility of pension funded status while locking in the gains as they occur over time. LDI strategy is fully customized to each pension plan sponsor’s objectives and specifics of their pension plan, and fully reflects current market conditions and funded status of the pension plan.

The LDI approach is related to the entire pension trust, because the key feature of LDI strategy is a commitment to dynamic asset allocation. Typical LDI strategy starts with only a certain percentage of assets allocated to the LDI strategy. However, periodic rebalancing is performed over time, according to the dynamic asset allocation rules adopted at the inception of the strategy. The risk profile of a pension plan is analyzed and dynamic asset allocation decision rules are created based on the Asset Liability Management (ALM) studies, carried out at the inception of the LDI strategy and repeated every 2-3 years.

The main objective of LDI strategy is to minimize the tracking error of assets in relation to liabilities, i.e. to control the variability of pension plan’s funded status. As a result, the most appropriate benchmark for the LDI strategy is the “return” on pension plan’s liabilities, and the liability-based benchmark is the key to accurately assessing the performance of LDI strategies.

LDI White Paper