Hibernation: Managing a Sleeping Bear

Liability-Driven Perspectives

Many asset managers today advocate that plan sponsors consider a risk-reduction strategy called “hibernation” with promises that sponsors can then sleep soundly. Hibernation is a liability-driven investment (LDI) strategy which aims to achieve the same risk reduction as a pension plan buyout by selling risk assets and buying bonds that match the interest rate risk of the pension plan’s liabilities.

But just as glidepaths don’t always “glide” (these last few years have been more of a rollercoaster), we believe hibernation is a sleeping bear that needs to be carefully watched. In this paper, we consider how a pension plan's risk profile evolves over time, and how the interplay between a smarter hibernation strategy and different de-risking tools can allow a plan to slowly wind down in both size and risk.