Briefing note
LDI in the LGPS
06 Dec 2022
Overview
The recent turmoil in gilt markets brought Liability Driven Investment (LDI) to the front pages of mainstream news. LDI strategies are widely used amongst private sector funds to reduce the impact of fluctuations in interest rates and inflation on their funding position. The extreme volatility in government bond markets seen in recent months exposed the vulnerabilities of this technique and has led some to question whether the risks were truly understood.
Fortunately, LDI is largely absent from LGPS investment strategies. We have always questioned its role for a long-term, open-ended scheme, largely based on the benefits not justifying the significant costs and risks. However, the recent extreme volatility provides an opportunity to reassess this view.
Key messages in this briefing note include:
- Recent market volatility and turmoil in gilt markets has brought LDI under the spotlight
- LDI can be used by pension funds including the LGPS as a risk management tool but be aware of the dangers of leverage
- Focus on the risks that matter most to your fund and reflect your governance arrangements
- We believe investment strategy should be considered holistically - rather than hedging out specific risks, focus on the need to generate positive long-term real investment returns
If you have any questions on anything covered, please get in touch.
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