A crucial time to evolve LDI allocations
The average corporate pension plan’s funded status has increased by over 15% since 2020. However, many pension plans have LDI portfolios built to generate outsized returns in the previous low-rate, low-yield, and lower-funded status environment. With many pensions now fully funded and beyond, we believe it is a crucial time to evolve LDI allocations for the new objective of safeguarding funded status gains and reducing volatility.
Source: Milliman, 2025 Corporate Pension Funding Study, as of June 2025. The Milliman 100 Pension Funding Index tracks the funded status of 100 U.S. public companies sponsoring the largest defined benefit (DB) pension plans.
The next evolution of LDI: Seek to safeguard funded status gains
Since the Global Financial Crisis, liability hedging strategies have evolved from a simple shift to long-duration assets into complex programs aimed at reducing asset-liability mismatches and funding ratio volatility. Today, with the "end game" of pension hibernation or annuitization closer than ever, plan sponsors face an asymmetric risk: limited upside from over-funding but significant downside from underfunding, which can lead to higher PBGC premiums, increased corporate contributions, and greater balance sheet volatility.
We believe this marks the third phase of pension liability management, requiring a new approach to hedging. This phase emphasizes lowering funded status volatility and securing gains through diversification and downside management. Properly managing credit risk and surplus volatility is crucial to maintaining these gains, especially in a challenging economic environment.
Downside mitigation in hedging portfolios key to preserving funded status
The three evolutions of LDI frameworks
EXCLUSIVE RESEARCH
Coalition Greenwich LDI Research Study: Corporate DBs Move to Secure Funded Status Gains and Begin Endgame
In the first research study of its kind in over 5 years, Coalition Greenwich conducted interviews with 30 US corporate defined benefit plans to understand their present and future intentions in the management of their LDI allocations. Based on the results of this survey you will find:
- The way plan sponsors are thinking about managing funded status volatility
- How and why plan sponsors are adjusting LDI allocations for a new fully-funded era
- How plan sponsors are preparing plans for the end state
The survey results contain the opinions of the respondents and not necessarily those of other corporate DB plans. Survey results also have inherent limitations and are for illustrative purposes only.
*Methodology of firms selected in disclosures.
WEBINAR
Perspectives from LDI Experts: Unpacking the Coalition Greenwich LDI Research Study
Join pension experts from Coalition Greenwich, Mercer, Sterling Capital and Franklin Templeton as they explore the key implications of the new fully funded landscape for corporate defined benefit plans.
Key Topics:
- Reveals the top findings from the Coalition Greenwich corporate pension LDI investor study.
- Examines how corporate pension plans are changing their objectives given their robust funded status gains and the volatile market environment.
- Explores the practical approaches pensions are taking to lower funded status volatility, seek to safeguard gains, and reposition for endgame scenarios.
Featured Research
EVOLVING LDI APPROACHES
The next evolution of LDI: Seek to safeguard funded status gains and prepare for the future
In our view, many current LDI allocations are composed of managers whose investment styles rely on concentrated exposures to credit risk that can make their strategies vulnerable in economic downturns. Learn why we think LDI allocations need to evolve to further reduce funded status volatility and help prepare pension plans for end game scenarios.
An examination of behavioral biases in long duration fixed income approaches
Learn how different behavioral biases can influence the performance of investment-grade credit managers in various risk-on and risk-off market environments.
Tapping into misunderstood alpha source: Portfolio construction
In the US long duration credit universe, behavioral bias can lead to structural inefficiency. By understanding the impact of these biases, credit managers can take advantage of and uncover new sources of alpha through portfolio construction.
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Contact a member of the Franklin Templeton Institutional team to learn more about investment strategies, solutions and services.