Liability Driven Investment - LDI

AAA

DEFINITION of 'Liability Driven Investment - LDI'

A form of investing in which the main goal is to gain sufficient assets to meet all liabilities, both current and future. This form of investing is most prominent with defined-benefit pension plans, whose liabilities can often reach into the billions of dollars for the largest of plans.

INVESTOPEDIA EXPLAINS 'Liability Driven Investment - LDI'

LDIs are most prominent in the funding schemes of defined-benefit pension plans, which are designed to provide a predetermined pension upon retirement. The liabilities in these funds arise as a result of the "guaranteed" pensions they are supposed to provide to members upon retirement.

In the early 2000s, the entire structure of the defined-benefit scheme was criticized as being faulty. The liabilities that sponsoring companies and plan members must pay for has increased substantially, which has caused some pension plans to reduce benefits to retired members, or even to shut down entirely.

RELATED TERMS
  1. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  2. Defined-Contribution Plan

    A retirement plan in which a certain amount or percentage of ...
  3. Pension Plan

    A type of retirement plan, usually tax exempt, wherein an employer ...
  4. Pension Shortfall

    A situation in which a company offering employees a defined benefit ...
  5. Plan Participant

    A plan participant either contributes into a pension plan or ...
  6. Defined-Benefit Plan

    An employer-sponsored retirement plan where employee benefits ...
Related Articles
  1. Retirement

    The Investing Risk Of Underfunded Pension Plans

    Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan.
  2. Retirement

    Introduction To Social Security

    You've probably contributed to this fund, but will you reap the benefits? Find out here.
  3. Budgeting

    The Demise Of The Defined-Benefit Plan

    Experts are making bleak predictions for your post-work years. Be prepared and plan for your future.
  4. Retirement

    Who bears the investment risk in 401(k) plans?

    Who actually bears the investment risk in a pension plan depends on the type of pension plan that is employed. In a broad sense, there are two benefit formulas that will calculate the pension ...
  5. Taxes

    The 401(k) and Qualified Plans Tutorial

    Learn about eligibility requirements, contribution to and distribution rules for these retirement plans.
  6. Professionals

    Retirement Bliss? Not So fast: When Savings Lag

    Most people aren't saving enough for retirement. Here are some tips savers and financial advisors can use to change that.
  7. Fundamental Analysis

    What are the most common issues with Serial Correlation in stocks?

    Read about the concept of serial correlation in stock returns, and learn why market analysts are divided about the efficacy of trading based on stock patterns.
  8. Bonds & Fixed Income

    How do I calculate yield to maturity of a zero coupon bond?

    Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than a bond with a coupon.
  9. Fundamental Analysis

    What does the term 'invisible hand' refer to in the economy?

    Discover and understand the concept of the "invisible hand" as explained by Adam Smith, considered the founder of modern economic theory.
  10. Fundamental Analysis

    At what level is the current account deficit considered excessive, in terms of percent?

    Take a deeper look at the variables that impact current account deficits, and learn why not all types of deficits have equal impacts on a nation's economy.

You May Also Like

Hot Definitions
  1. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  2. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  3. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  4. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  5. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
  6. Dividend Discount Model - DDM

    A procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The ...
Trading Center