Understanding the Difference

LDI strategies align assets with liabilities to reduce sensitivity to interest rate changes. While this helps stabilize funded status, it requires ongoing management and still leaves exposure to participant longevity, credit and market risks.

A buy-in annuity fundamentally changes the equation. The insurer assumes responsibility for benefit payments associated with the covered liabilities, taking on investment, interest rate and longevity risk. This transforms uncertain obligations into insured, predictable outcomes, shifting from risk management to risk transfer.

When Is the Right Time?

The right time to execute a buy-in is less about perfectly timing the market and more about aligning funding, strategy and organizational readiness.

	Funded Status Reaches a Strategic Threshold Plan sponsors do not need to wait until full funding to act. Buy-in annuities can be viable when a plan is approximately 75% to 80% funded, particularly for retiree liabilities. At this stage, sponsors can meaningfully reduce risk by locking in pricing and protecting a portion of the plan from future volatility. Rather than relying solely on LDI to attempt to maintain alignment over time, a buy-in allows sponsors to remove uncertainty earlier in the journey and transfer more risk.
	Favorable Market Conditions Higher interest rates and stronger insurer competition can create attractive pricing opportunities. A buy-in allows sponsors to lock in those conditions at a point in time, rather than continuing to manage exposure as markets evolve. While LDI benefits from these same conditions, it remains dependent on ongoing portfolio performance and rebalancing. A buy-in captures the opportunity and converts it into certainty while taking on the mortality/longevity risk.
	A Desire for Comprehensive Risk Reduction LDI primarily hedges interest rate risk. It does not eliminate longevity risk, which can be substantial or reduce the operational complexity of maintaining a pension plan. A buy-in addresses these gaps by transferring multiple risks simultaneously. For sponsors focused on reducing both financial volatility and administrative burden, this more complete approach provides a meaningful advantage
	Focus on Retiree Liabilities Buy-ins are especially effective when applied to retiree populations. These liabilities are stable, well understood and efficient for insurers to price and assume. Removing retiree obligations reduces volatility and simplifies plan management, while transferring the portion of the plan most exposed to longevity risk. This is something LDI cannot hedge.
	Alignment with Endgame Strategy Buy-ins are increasingly used as part of a broader, phased approach to risk transfer. By executing earlier, sponsors can lock in insurer pricing and capacity, gaining clearer visibility into future costs. This is particularly valuable for plan sponsors considering termination. In traditional approaches, final annuity pricing is not known until late in the process, often creating uncertainty around total cost. A buy-in executed earlier provides greater upfront clarity, allowing sponsors to plan more effectively and proceed with confidence.

Why a Buy-In Annuity Is the Stronger Hedge

LDI is often described as a hedge strategy, but it remains inherently incomplete. It reduces exposure to certain risks while relying on continued market performance and alignment.

A buy-in annuity, by contrast, functions as a true hedge for the covered liabilities:

• Eliminates market and interest rate risk for the insured segment
• Transfers longevity risk to the insurer
• Locks in outcomes, rather than depending on ongoing asset performance
• Reduces volatility immediately, not gradually over time

In effect, it converts a variable liability into a fixed obligation backed by an insurer. That level of certainty is something LDI cannot replicate.

Case Study: Acting earlier to reduce risk

A mid-sized healthcare organization with a frozen defined benefit plan was approximately 78% funded and had implemented an LDI strategy to manage interest rate risk. Despite this, the plan continued to experience funded status volatility driven by market movements and longevity assumptions.

Rather than waiting to reach full funding, the sponsor executed a buy-in annuity covering its retiree population, representing roughly 45% of total liabilities. This allowed the organization to lock in insurer pricing at a favorable point in the market and immediately reduce exposure to interest rate and longevity risk for that segment.

Following the transaction, funded status volatility declined significantly and the plan’s overall risk profile became more predictable. With retiree liabilities effectively insulated, the sponsor was able to focus on improving the funded position of the remaining population.

Equally important, the buy-in provided clearer visibility into the eventual cost of full risk transfer, enabling more confident planning for a future plan termination. What had previously been an open-ended risk management process became a defined, strategic path forward.

A Strategic Shift

As plans mature, sponsors are increasingly moving from managing risk to removing it. Buy-in annuities support this shift by enabling incremental de-risking, starting before full funding is achieved and progressing over time.

At the same time, adoption continues to grow as insurers expand capacity and product flexibility. Buy-ins are becoming more accessible and more closely aligned with plan sponsor objectives across a wide range of plan sizes and stages.

The right time for a buy-in annuity is when funding, market opportunity and strategic goals align, not when conditions are perfect. For many plans, that point arrives sooner than expected.

As the most effective hedge against pension risk, a buy-in offers something beyond protection: certainty. By locking in outcomes, reducing volatility and providing a clearer path to plan termination, it allows plan sponsors to move forward with greater confidence and control.