Liability Driven Investment (LDI) in Australia: 2025 Trends & Strategies

Liability Driven Investment (LDI) is no longer just a buzzword in the world of institutional investing—it’s a cornerstone strategy for Australian super funds, insurers, and even family offices. As market volatility, regulatory change, and demographic shifts accelerate in 2025, LDI is helping investors balance returns while securing the cash flows needed to meet future obligations.

What is Liability Driven Investment and Why is it Booming in 2025?

LDI is an investment approach focused on aligning a portfolio’s assets with its expected liabilities—think pension payments, insurance claims, or any future cash outflows. Rather than chasing benchmark-beating returns at all costs, LDI prioritises matching investment outcomes to specific, known obligations. This strategy is especially relevant as Australia’s population ages and defined benefit superannuation schemes grapple with longer retirements and low-yield environments.

• Demographic Pressures: With ABS data projecting that over 22% of Australians will be aged 65+ by 2030, super funds face increasing pressure to ensure they can meet long-term pension commitments.

• Regulatory Shifts: APRA’s 2025 guidance now requires more robust stress-testing of asset-liability management, pushing funds to adopt more sophisticated LDI frameworks.

• Low Yield World: The RBA’s steady rate environment, with the cash rate hovering near 3.85% in early 2025, means traditional fixed income returns remain modest, prompting funds to seek creative ways to match liabilities without excessive risk.

How Australian Funds are Implementing LDI Strategies

Historically, LDI was the domain of defined benefit super schemes. Now, insurers and even some high-net-worth investors are embracing the approach. Implementation varies, but common themes include:

• Customised Fixed Income Portfolios: Funds are building bond ladders and using inflation-linked securities to create income streams that match projected outflows.

• Use of Derivatives: Swaps, futures, and options allow investors to hedge interest rate and inflation risk without tying up all capital in low-yielding assets.

• Dynamic Asset Allocation: As liability profiles change, so too does the portfolio—LDI is not a ‘set and forget’ approach. Many funds now use real-time analytics to rebalance as new actuarial projections emerge.

Example: In 2025, AustralianSuper announced the expansion of its LDI program, integrating longevity swaps and inflation caps to better manage the risk of retirees living longer than expected and inflation outpacing returns.

Risks, Rewards, and the Future of LDI in Australia

While LDI offers powerful risk management, it’s not without challenges:

• Complexity: Building and maintaining an LDI program requires deep actuarial expertise and ongoing monitoring.

• Market Liquidity: Sourcing long-dated, inflation-linked bonds can be tricky in Australia’s relatively small bond market, sometimes pushing funds to offshore markets or synthetic solutions.

• Cost: Derivative hedging and bespoke portfolio construction can increase fees, though many funds argue these costs are outweighed by reduced funding risk.

However, the rewards are clear: better alignment of assets and liabilities, smoother funding ratios, and greater confidence in meeting future promises. Looking ahead, expect technology to play an increasing role—machine learning is already being used by some funds to simulate liability scenarios and optimise hedging strategies in real-time.

Conclusion: Why LDI Matters for Australian Investors Now

LDI has moved from niche to necessity in Australia’s evolving financial landscape. For super funds, insurers, and sophisticated investors, this approach offers a way to navigate uncertainty, manage risk, and deliver on long-term promises. As regulations tighten and member expectations grow, expect LDI to remain front and centre in 2025 and beyond.