I was fortunate enough to present at the Professional Pensions conference The Future of Pensions Consulting on 3 November 2015, which was an engaging day which ranged over a really interesting array of topics, from employee engagement in DC to the possible outcomes of an EU referendum.
I’ll spoke about LDI, which is an issue very close to my heart and one that I feel quite lucky to have observed from a relatively early stage in it’s life in a previous role at Mercer in the early 2000’s, through to my role today at Redington.
I’m very conscious that LDI can all too often be shrouded in acronyms and jargon, and also that scheduling dictates I’ll be standing between the conference delegates and lunch! So my aim was to keep the talk accessible and high level but also try and pose some challenging questions.
Themes I explored included:
- The first LDI swap for a UK pension fund was transacted “way back” in 2003, what’s been the general backdrop for the LDI market since then?
- How has the market developed, in terms of size, mandates, and providers >> and what has this meant for UK pension funds?
- Based on the experience of the first 12 years, what can we say has “worked” – I singled out three things (hedging itself; collateral management and pooled LDI)
- More importantly perhaps, what hasn’t worked – I put 4 things on my “LDI lowlights” list (market level triggers, cashflow matching, proxy hedges and inflation-only hedging)
- I finished with a number of predictions for areas that we’ll hear a lot more about in LDI over coming years (basis risk, deflation risk and regulation).
The level of long-dated interest rates is naturally a key driver of psychology and behaviour around LDI – acting both for and against, and while this will no doubt continue to be the case one of my core points is LDI has, and will continue to be, about risk management rather than “calling” interest rates (which is something that’s been very hard to get right historically). LDI is consistent with a rising interest rate environment.
I put it to the audience that you can’t risk manage a defined-benefit pension scheme effectively without LDI, and data from the PPF 7800 index (below) backs that up. While assets have grown steadily at modest volatility, liabilities have soared with nearly 3x the volatility. LDI is central to getting this risk under control.
I’m very much looking forward to the talk, and interested to get some challenging questions, I hope to see you there!