The combination of low interest rates, extreme market volatility, and limited funded status progress in 2020 compelled plan sponsors to reassess liability-driven investing (LDI). This reassessment revealed the impact of the market turbulence and also brought to light the strong relative performance of. LDI strategies and their broader role in portfolio risk mitigation.
2020 in hindsight
Amid historic volatility, LDI returns significantly exceeded expected returns in both 2019 and 2020, returning 14%-17% in2019, and 12%-15% in 2020,depending on the duration of liabilities. LDI (along with U.S. Large Caps) was one of the two consistently strong positive contributors to investment portfolios. In addition to positive returns, LDI continued through 2020 to serve as a hedge for the present value of pension liabilities, which declining discount rates increase.
That being the case, we could not underestimate the impact of the current ultra-low rate environment. Despite a significant increase over the last few months, 10-year treasuries are trading at 1.55%, almost 126 basis points below what they were two years ago.
Pension plans experienced several tangible challenges coming into 2021:
- Funding levels remain challenged, despite strong asset gains and excluding the extremely well-funded and well-hedged plan sponsors.
- A decline in expected portfolio return as fixed-income yields were low. Lower expected returns may be insufficient to meet plan obligations without additional contribution in the future.
- Finally, the extension and expansion of funding relief has further separated the pension measures of accounting and funding purposes. LDI allocations now provide limited benefit in protecting the plan from required contribution demands.
Information provided by SEI Investments Management Corporation, a registered investment adviser and wholly owned subsidiary of SEI Investments Company.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.
Investing involves risk including possible loss of principal. There can be no assurance goals will be achieved nor that risk can be managed successfully.