A Big Year for LDI
One of our funniest chief investment officers told us this month that liability-driven investing (LDI) can be a dangerous topic to read because people “risk falling asleep and banging their heads into the sharp pencils on their desks.” CIO took
that peril into account when we chose topics for this month’s special LDI issue. We’ve
looked for trends in the industry, macro forces, and newsmakers that may shape the future
of LDI, and, hopefully, delivered it to you in an interesting way.
I write this letter on the heels of the aggressive proposal released by the House’s Ways
and Means Committee, which aims to cut the tax rate by 20%. A flurry of negotiations will
begin and some pundits are estimating a tax cut likely to
pass by Q1 2018. Meanwhile, US rate hike considerations
will commence again in December. The Bank of England
is making its first rate hike in 10 years.
As you can expect, tax shelters and rising rates are
playing big in the LDI space this year, and are spurring
many CIOs to pour more funding into their plans. Q3
showed a 2% improvement in funded status, with the
average plan rising to 83% funded as of September 30,
according to Conning’s Pension Funded Status Tracker.
2017 is a favorable year to fund, especially since Pension
Benefit Guaranty Corporation (PBGC)premiums are
going to rise from 3.4% this year to around 3.8% in 2018,
and by some estimates, to 4.5% by 2020. According to
consultants, another strong trend is for asset owners with
frozen plans to primp and bolster their plans to make
them attractive to insurance companies to get the liabilities off their balance sheets.
We checked in and interviewed CIOs who have infused at least $1 billion into their
plans this year. Some have issued debt to do it, seeing prospects align in 2017. We asked
them to offer their advice on the process to their CIO peers, and, as always, they gave
terrific insights, even when it came to talking about hard lessons learned. Such is the
quality of our CIO community.
Speaking of our community, I am truly looking forward to December 7, the day we
honor the most innovative asset owners and asset managers in the world. Many of you will
be flying in from overseas and across the country, and the day promises to be fascinating.
As always, it will start with a Harvard Club forum under Chatham House rules, in which
many of you will share your strategies in the ‘new, new normal’ investment climate of
rallying stocks, frothy valuations, and unwinding stimulus.
Then we’ll head to the bedecked New York City Public Library for our awards gala.
Our Lifetime Achievement Award will be given to Ash Williams, who left his hedge fund
career to become CIO of the fifth-largest US public pension plan, Florida State Board of
Administration, directly after the financial crisis. At the time, its assets had dropped from
$141.3 billion to $83.7 billion. He brought it back to health. Ash always has plenty to teach
and will be leaving his native Florida for a frosty December night in New York to share the
CIO evening, and like many of you, to see his friends, toast their success, and learn. Even
if it’s cold outside, it promises to be a valuable and warm event. —Christine Giordano, Editor
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LETTER FROM THE EDITOR
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