De-risking
LDIs and alternatives are the top de-risking strategies

For the fourth consecutive year, “liability-driven investments” (LDIs) remained the most effective de-risking strategy but continued their decline from a high of 39% in 2017 to 26% this year. New option “use of alternative investments” emerged as the second-most popular tool (23%), significantly ahead of “buy-out annuities,” which declined in importance year-over-year (18% to 12%), particularly among mid-sized plans (17% to 5%).

“Use of alternatives” was identified as the most popular de-risking strategy among mid-sized, public and private-public plans (33%, 28% and 31%), as well as those accepting new members (28%). “Target benefit plans” declined in popularity overall (17% to 11%). However, this option is particularly popular among public plans (tied for first place with alternatives as the most effective de-risking option at 28%), compared to significantly lower levels of popularity among private-public and private plans (6% and 4%).

A holistic approach

  • LDIs
    continue to be the top de-risking strategy but their importance is declining
  • Use of alternatives
    emerges as a key de-risking strategy, overtaking buy-out annuities for second place
What do you consider the most effective de-risking strategy?
This chart shows the year-over-year change in respondents’ top choices for the most effective de-risking strategies.

*Including active management; asset-liability management; changing jurisdictions to qualify for solvency funding exemption rules; converting to a jointly-sponsored pension plan; merging with another plan; and moving to a defined contribution plan

The potential for higher returns

LDIs continued to be the top de-risking strategy overall; however, their year-over-year popularity was lower across all categories except mid-sized plans, which increased from 38% to 47%. The decline in 2020 builds on previous years’ downward trends, which followed the easing of pension funding rules in Quebec, Ontario and British Columbia, and the ability to smooth contributions over longer time periods in various other provinces. These changes made it more attractive for pensions to take on potentially riskier and higher-return investments such as alternatives to help alleviate funding pressure from a growing base of pensioners with a higher life expectancy. Accordingly, use of alternatives has emerged as the second-most popular de-risking strategy and a recurring theme throughout this report.

A cautionary note

While the prominence of alternative investments has been rising in today’s low-yield environment, Serge Lapierre, Senior Managing Director and Global Head of Liability-Driven Investments at Manulife Investment Management, offers a word of caution on the use of alternatives for de-risking. “It’s important to take a holistic approach and, when there are multiple symptoms, don’t just treat the one that is most obvious,” he says. “Be sure to find the right balance between the possibility of earning higher returns through investments such as alternatives and the need to have a proper hedge against your liabilities. You can’t make decisions in silos.”

It is important to find the right balance between earning higher returns and managing your liability risks.

—Serge Lapierre, Manulife Investment Management