There are many investment strategies available to pension schemes and understanding them can often be difficult. Liability Driven Investing or “LDI” is one approach and aims to invest in assets that mirror the movement of liabilities and so reduce the volatility in the funding level of a final salary pension scheme.
LDI is typically used for schemes which are closed to future accrual as the cash flows are easier to predict than in an open scheme and so a more certain hedge can be constructed. An LDI strategy will employ derivatives to hedge the risks associated with the scheme’s liabilities, often through pooled funds which allows schemes of most sizes to access a solution of this type.
As with any investment strategy it is important to consider the timing of the transition of the assets. A flight path can provide a framework for a number of pre-agreed asset allocation transactions to take place easily and quickly, sometimes without relying on trustee and advisor intervention. This allows risk in a scheme to be reduced gradually as the funding level increases.
The Mazars team has experience in planning and implementing LDI strategies for final salary pension schemes. We pride ourselves in being able to communicate the tricky concepts involved in these strategies simply and effectively and would be pleased to provide one off training to sponsors or trustees as well as full advisory services.