A liability-driven investment strategy, also known as LDI, is a framework by which a plan sponsor is trying to ensure that the asset strategy is going to be matching the liabilities of the underlying pension fund. By adding those assets that are sensitive to the same risks that the liabilities are, they attempt to equate those risk factors such that the funded status is least volatile over the course of the future years, thereby reducing the chance of putting contributions into the pension plan in the future.

So certain pension plan sponsors still think that there is upside in terms of potential gains to be had by maintaining these risk-seeking assets. However, if you are fully funded or overfunded, there is more downside risk than upside to gain if you continue to expose yourself to equity or equity-like assets in your asset allocation.

In order to determine an appropriate asset allocation where you need to put some assets in risk-seeking or growth assets and a hedging portfolio, also known as the liability matching assets, each pension plan sponsor needs to look at what the risks associated are with an investment strategy that aligns with the liabilities and also look at what their risk budget is in order to then assign how much risk they are willing to tolerate, given an investment strategy framework.

So over the last 10 to 15 years, the average pension fund had been underfunded. The last couple of years, we saw that that had completely turned over, and the average pension plan is now fully funded. That is because the equity markets have had a good run, but more importantly, the long dated interest rates have come up quite significantly. That's helped the present value of the liabilities come down quite substantially.