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Pensions Expert Article: LDI turbulence – the case for independent oversight

This article was published in Pensions Expert | January 6, 2023 By Roger Brown

In times of crisis, pension funds’ investment strategies are put to the test – and 2022 has hardly been short of crises.

Resurgent inflation, rising interest rates ,and Russia’s invasion of Ukraine had already led to dramatic volatility in bond and equity markets, before an abrupt shift in UK fiscal policy caught investors by surprise and made matters worse.

On September 23, the Truss government’s “mini” Budget promised a programme of sweeping tax cuts unbalanced by any reductions in spending. Gilt yields surged in response, with immediate consequences for many defined benefit pension schemes.

Over the past two decades, DB schemes have widely adopted liability-driven investment to sustain and improve their funding levels.

Many LDI products hedge against the prospect of falling gilt yields, which increase schemes’ liabilities, and most employ leverage to boost exposure to gilts as matching assets.

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9th January 2023