Conversational LDI – Hedge Ratios

April 19, 2021

 

Please stay tuned for the next video in our Conversational LDI video series: The Case for LDI

Transcript

Glossary:

Funded Status: The ratio of plan assets to liabilities. A fully funded plan has a 100% funded status. An overfunded plan has a funded status greater than 100%. An underfunded plan has a funded status under 100%.

Duration: Measures the sensitivity of liabilities and fixed income prices to changes in interest rates. A rough approximation is that duration/100 is the percent change for every one-percent change in interest rates. Liability present value and fixed income prices have an inverse relationship with interest rates. That is, as rates rise, liabilities and fixed income prices fall (and vice versa).

End State: The end state in an LDI journey is generally either termination (i.e., pension risk transfer through buying annuities with an insurer) or hibernation (i.e., self-sufficiency where investment returns offset plan expenses).