Liability Driven Investing Gains Favor With Corporate Pension Plan Sponsors

Kraft Foods Group actively seeks to reduce pension plan funding volatility with a liability-driven investment (“LDI”) structure, according to a company release for the fourth quarter of 2012. Many other Fortune 500 pension plan sponsors, as well as some municipal plans, are following a similar risk management strategy.

Liability-driven investing is an increasingly popular investment technique being used to match pension plan assets with liabilities. Pension plan sponsors with responsibility for defined benefit plans are reducing their exposure to the equity markets by using more predictable investments, such as bonds, to fund future obligations.

Top 10 Pension Funds using a Liability-Driven Investing Strategy

Pensions and Investments identifies the pension funds listed below as the leading domestic LDI adopters, as of September 30, 2012. The amount of total defined benefit assets (not necessarily assets in an LDI investment program) for each plan sponsor is provided in parentheses.

1. General Motors ($101.9 billion)
2. Boeing ($55.5 billion)
3. IBM ($53.4 billion)
4. Ford ($42.2 billion)
5. Alcatel-Lucent ($34.3 billion)
6. Missouri Public Schools ($28.4 billion)
7. Verizon ($25.5 billion)
8. UPS ($25.1 billion)
9. United Technologies ($22.5 billion)
10. FedEx ($17.9 billion)

More than half (57 percent) of corporate pension sponsors adopt some form of liability-driven investing, according to a 2012 poll conducted by SEI, a public company that provides investment management business outsourcing solutions. Of those plan sponsors who use LDI, more than half (52 percent) invest at least 40 percent of their portfolio assets in a liability-driven program.

LDI Programs Affect Discount Rate Assumptions

Kraft announced a significant reduction in their assumed rate of return on assets (from 7.75% to approximately 5.5%) as they rebalance their portfolio to meet a goal of 80% fixed income and 20% equities. Higher rates of return on today’s buoyant stock market are attractive, but Kraft seeks to improve transparency, simplify accounting, and reduce corporate cash flow volatility under the LDI program. The firm is also moving to adopt mark-to-market accounting for its pension plan.

Funded status may take priority over interest rates under an LDI program, which can be a difficult adjustment for defined benefit plan managers. Better levels of predictability, however, can help plan sponsors to more effectively meet pension funding rules in regard to balance sheet and cash-flow requirements.

Decision Factors in Liability-Driven Investment Programs

Industry consultants suggest that plan sponsors address basic planning concepts during the implementation and management of an LDI strategy, including:

• Establish a timeline for meeting risk reduction goals through asset allocation
• Evaluate the transfer of obligations to a third party
• Maintain a close watch on funded status of a plan
• Avoid the distraction of higher interest rates associated with more risky investments

Additional liability reduction options may include lump sum payments, buy-in and buy-out strategies, and annuities.


Liability-driven investing continues to be a popular risk management strategy. It is being rapidly adopted by leading Fortune 500 pension plan sponsors that seek to reduce pension plan funding volatility. LDI strategies can increase financial transparency while also helping a sponsor to comply with stringent accounting and pension funding requirements.

Why IT Executives Need to Be Business Leaders

The key requirement to being a successful CIO is to be a business leader “first and foremost” – although one with a specific responsibility for IT, says Professor Joe Peppard, Director of the IT Leadership Programme at Cranfield School of Management.

IT executives are seeing their roles evolve from technologists to drivers of innovation and business transformation. But numerous research studies show that many IT leaders struggle to make this transition successfully, often lacking the necessary leadership skills and strategic vision to drive the organisation forward with technology investments.

Developing business skills

At the very minimum, IT executives need to show an understanding of the core drivers of the business. But successful CIOs also possess the commercial acumen to assess and articulate where and how technology investments achieve business results.

A recent ComputerWorldUK article paints a bleak picture of how CIOs measure up. “Only 46% of C-suite executives say their CIOs understand the business and only 44% say their CIOs understand the technical risks involved in new ways of using IT.”

Crucially, a lack of confidence in the CIO’s grasp of business often means being sidelined in decision-making, making it difficult for them to align the IT investment portfolio.

Developing leadership skills

A survey carried out by Harvey Nash found that respondents reporting to IT executives listed the same desired competencies expected from other C-level leaders: a strong vision, trustworthiness, good communication and strategy skills, and the ability to represent the department well. Only 16% of respondents believed that having a strong technical background was the most important attribute.

The ability to communicate and develop strong, trusting relationships at every level of the company (and particularly with senior leaders) is essential not just for career progression, but also in influencing strategic vision and direction. As a C-level executive, a CIO must be able to explain technical or complex information in business terms, and to co-opt other leaders in a shared vision of how IT can be harnessed “beyond simply competitive necessity”. Above all, the ability to contribute to decisions across all business functions enhances an IT executive’s credibility as a strategic leader, rather than as a technically-focussed “service provider”.

Professor Peppard notes that the majority of executives on his IT Leadership Programme have a classic Myers Briggs ISTJ personality type. Generally speaking, ISTJ personalities have a flair for processing the “here and now” facts and details rather than dwelling on abstract, future scenarios, and adopt a practical approach to problem-solving. If you’re a typical ISTJ, you’re happier applying planned procedures and methodologies and your decision making will be made on the basis of logical, objective analysis.

While these traits may suit traditional IT roles, they’re very different from the more extrovert, born-leader, challenge-seeking ENTJ type who are more comfortable with ambiguous or complex situations. The training on the IT Leadership Programme develops the key leadership abilities that IT executives are typically less comfortable operating in, but which are crucial in order to be effective.

Align yourself with the right CEO and management team

The challenge in becoming a great business leader is partly down to other people’s misconceptions and stereotypes, says Joe Peppard, and how the CEO “sets the tone” makes all the difference. His research uncovered examples of where CIOs who were effective in one organisation moved to another where the environment was different, and where they consequently struggled.

A CIO alone cannot drive the IT agenda, he says. While the CIO can ensure that the technology works and is delivered efficiently, everything else required for the business to survive and grow will depend on an effective, shared partnership with other C-level executives. Many IT initiatives fail because of organisational or “people” reasons, he notes.

Other executives have a clear role to play. They need to be sufficiently IT-literate to understand the strategic potential of IT and how it impacts performance and generates value. Successful IT projects (where investments are fully optimised), are characterised by active involvement across the management levels impacted. The findings in the ComputerWorldUK article support this research. Companies which view the CIO as a strategic partner are much more likely to achieve better results. Rather than simply viewing IT as a way to cut costs or improve efficiency, harnessing its potential helps create value and new revenue sources

Spring Clean Your Way to a Better Business

Whether you are new to the real estate investment word, or a seasoned veteran like me, it is always a wise idea to take some time to re-evaluate, clean up and organize your real estate business. You will be surprised how a little spring cleaning can go a long way to improving your business and even boosting your profits.

Follow this simple spring cleaning advice and give your business the boost it needs for great success and profits.

Create a Plan of Attack

First of all, you should sit down and create a plan of attack for your spring cleaning. So, start with a plan. Write your ideas down and then organize them into chronological categories based on due dates-when you want things to be done.

Re-organize to Re-evaluate

Start off nice and easy. A good step to get you going in your spring cleaning would be to clean up your regular workspace. Not only could this help you get organized, but it could also help generate ideas for your plan. Try to clear off your desk, create files and organize your papers. This is a good thing to do periodically, not just at the beginning, middle and end of the year.

As you look around your office, think about how else you can better organize your business. For me, technology comes to mind. There are always new products and services emerging, and some of them are very helpful for our line of work. Using newer technology will make you and your staff more efficient and effective. Your business will thrive by investing in new technology.

It is important to strike a good balance between technology for paper. In order to avoid any serious problems now or in your future, be sure you back up your electronic files. There are some very inexpensive products on the market that stand to save you a huge sum of money should you ever experience a major computer malfunction. Such products include Carbonite, which runs about $60 per year, or Dropbox which is actually free if you use a certain amount of space.

The bottom line here is take some time in your spring cleaning to ensure your systems are working and you are backing up every bit of data and information you store on your electronic systems.

Spruce up Your Marketing & Online Presence

Next up-your website. It’s easy to lose sight of what’s going on with your website when you are busy making deals. However, your website is an important element of your business. And it is an integral component of your marketing success (as well as your business success). Take some time now to evaluate and clean up any issues with your website.

You should first check to be sure your site is completely up to date. Check all dates and more importantly, all links. A broken link can mean lost business and lost profits. Fix those links now!

Speaking of marketing, don’t wait until an entire year goes by before you evaluate your marketing plan and efforts. Why wait when you could fix a problem now. If your efforts aren’t garnering you much business, changes things up. Waiting will only waste time and money.

Whether your current marketing efforts are going smoothly or not, spring is always a good time to implement a fresh approach to your outreach. A good friend of mine in the Midwest recently launched his own live online real estate talk show. He streams live every week. He’s publicizing his show throughout the industry and into the general business community as well. More and more people are beginning to know his name. Talk about creative!

Clean Up Those Contacts & Get Networking

As we all know, networking is a huge part of the real estate investment business. Assuming you have been doing as much networking as I have all winter, now is a good time to make sure you have all of your contacts in good working order. Take some time with your notes, business cards, etc. to review names and faces and conversations.

While you are organizing some of your newer contacts, make sure you don’t forget about older contacts. Clean up your database (or Rolodex) and take note of contacts you may not have spoken with nor done business with recently. Then, set aside some time to reach out to them. Keep your contacts fresh. You never know when your next business opportunity might arise-it could come from an old contact.

Take advantage of that fresh and new frame of mind that spring brings and spring clean your business to get on track for greater success through the second half of the year… and beyond. Re-evaluate, clean up and reorganize the various aspects of your work systems and spaces. You will inevitably improve your business and subsequently boost your profits.

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