Liability-driven investment policies and asset management decisions are those largely determined by the sum of current and future liabilities attached to the investor, be it a household or an institution.
It differs from a “benchmark-driven” strategy, which is based on achieving better returns than an external index such as the S&P 500 or a combination of indices that invest in the same types of asset classes.
Historically, bonds were used as a partial hedge for these interest rate risks but the recent growth in LDI has focused on using swaps and other derivatives.
[2] Various approaches will pursue a "glide path", which, over time, seeks to reduce interest rate and other risks while achieving a return that matches or exceeds the growth in projected pension plan liabilities.
[3] These various approaches offer significant additional flexibility and capital efficiency compared to bonds, but also raise issues of added complexity, especially when the rebalancing of an LDI portfolio following changes in interest rates is considered.