Advanced Topics in LDI Implementation for Corporate Plans

This technical report addresses advanced topics in liability-driven investment (LDI) implementation for corporate defined benefit (DB) plans, focusing on liability hedging strategies. It presents a detailed analysis of three main liability risks: interest-rate risk, credit risk, and yield-curve risk, emphasizing the prioritization of these risks based on historical volatility. The report answers key questions regarding the decision-making process for hedging plans, including whether to hedge surplus or funded ratios, and discusses the implications of these choices on balance sheet stability and benefit security. Additionally, it examines the credit risk contributions from equities and provides methodologies for optimizing credit exposure to minimize volatility. The report also contains a case study illustrating the dynamics of hedging strategies and how to measure the success of a corporate DB plan against its liabilities. Insights into the roles of LDI portfolio design, portfolio management, and the importance of evolving benchmarks are also provided, enhancing understanding for institutional investors.