Deutsche Lufthansa has allocated €9.14bn of pension assets to fixed income following the implementation of a liability-driven investment (LDI) strategy for its defined benefit (DB) plans.
The share of assets on the airline’s balance sheet used to cover DB obligations (Planvermögen) invested in fixed income rose to 49.7% at the end of 2024 from 37.6% the previous year, according to the group’s annual report.
Equity allocations fell over the same period from 34.5% to 24.7%.
The group, which reported total pension assets of €18.4bn last year, adjusted its allocation as it introduced the LDI approach for its largest remaining DB schemes.
Lufthansa said higher interest rates since 2022 had pushed the funding ratio for its DB liabilities close to 100%, prompting the move.
Under the strategy, assets are invested largely in fixed income and in derivative interest rate swaps to match the interest rate sensitivity of both assets and liabilities.
“As part of the LDI strategy, the asset side was invested to essentially replicate interest rate sensitivity on both the liabilities and assets sides, primarily through corporate bonds,” said senior director investment management Carlos Scheeren in an interview with Deutsche Pensions- & Investmentnachrichten (dpn).
Around 75% of pension obligations – up from around 50% – are now hedged against interest rate risk. The remaining 25% is invested in equities and alternatives under a growth strategy.
The LDI approach was implemented by restructuring the portfolio in the existing contractual trust arrangement (CTA), according to dpn.
Credit risk hedge
Lufthansa has targeted the US corporate bond market to hedge corporate spread risk, citing a shortage of euro-denominated corporate bonds with maturities beyond 10 years.
The US corporate bond market offers a “significantly larger offer, including long maturities and very liquid, high volumes”, Scheeren told dpn, adding that the “correlation with the euro market is very high”.
Currency risk from US dollar-denominated bonds is hedged via the SPIRE Multi-Dealer Repack Platform, a special purpose vehicle set up by 18 large banks to issue and convert bonds across currencies.
Lufthansa first selected an investment bank partner before appointing a US dollar corporate bond manager to build the portfolio.
“The asset manager receives cash flows that they must match with the portfolio – traditionally over the term of the buy-and-hold portfolio,” Scheeren said.
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