Liability Driven Investing (LDI)
Working in partnership with pension schemes to reduce risk and to achieve more stable funding levels
Three important reasons why defined benefit pension schemes adopt Liability Driven Investing (LDI):
- Pension scheme sponsors and trustees want to have an agreed plan of action to protect funding level improvements
- Sponsors want certainty over pension costs
- Sponsors and trustees want to reduce the 'size of the bet' on rising long dated interest rates and/or falling inflation expectations
At AXA Investment Managers, we help our clients navigate turbulent environments by working in close partnership to design and implement LDI solutions to meet their specific objectives and liabilities. We also believe all of our clients should be able to manage their interest rate and inflation risk in a cost effective way regardless of their size and governance budget.
Liability Driven Investing solutions for schemes of all sizes
Our LDI clients, both pooled and segregated, therefore benefit from our full range of services and our integrated approach focussed on managing risk and optimising returns:
- Solution design and implementation: providing investment expertise across a broad range of assets and instruments to manage and mitigate client-specific asset and liability risks.
- ‘Smart' Implementation: dynamically managing exposures to help ensure that they remain adapted to the scheme’s needs based on current market conditions and/or any changes to the context of the investments.
- Continuous monitoring and governance: On-going management aimed at maximising returns whilst minimising costs and risk using the most efficient hedging instruments
The emerging pension scheme challenge – managing cash-flow delivery
Defined benefit schemes, particularly in the UK and Ireland, are maturing and the amount they need to pay out in benefits is therefore increasing. In a prolonged low-yield environment, and with active membership falling substantially in recent years, managing cash flow to ensure schemes can meet pension payments as they fall due is fast becoming a bigger challenge than most expected. Going forward this means schemes’ assets will need to both generate the cash flow required to meet these payments and achieve growth to improve funding levels.
"Pooled funds now allow separate hedging of inflation risk independently of the levels of interest rates, allowing smaller schemes to reflect their own particular concerns."
Should schemes still turn to LDI?
With short-term inflation rising, are interest rates likely to go up? Should unhedged schemes go into LDI now? What role will cash flow play for LDI strategies? Jonathan Crowther and Sophia Heathcoat discuss their expectations for LDI.
- Forced Selling Mind the Gap
- The new pension scheme challenge - Managing cash flow efficiently
- How LDI could be implemented by Local Government Pension Scheme Pools 06/05/2016 722 KB PDF
- Sweating your matching assets: blending LDI with buy and maintain credit 30/10/2015 576 KB PDF
- LDI: Are you putting all your eggs in one basket? 30/10/2015 537 KB PDF