Custom LDI Solutions
Depending on Plan objectives, there are three categories of LDI solutions.
Extend Duration through a Long Duration Fixed Income Benchmark
This strategy is relatively easy to implement and utilizes the Lehman Brothers Long Government/Credit Index. Assets are matched to a market benchmark instead of being tied directly to the duration of the Plan liabilities.
Develop a Customized Benchmark to Reflect Liabilities
This strategy includes developing custom benchmarks in much the same way that insurance companies do to effectively employ a true asset liability management (ALM) strategy for the portfolio. This approach seeks to ensure that funding levels continually move in step with the changing liabilities of a plan.
Interest Rate Swap Overlay to Extend Duration
Plans that are comfortable with the additional complexity of derivative instruments may choose to implement an interest rate swap overlay. In its most basic form, this approach means that the underlying investments are not changed with the expectation that the existing assets (equities, alternatives, etc.) will generate long-term returns that are superior to risk-free assets. The interest rate swaps become the tool to affect the duration needs of the plan.