What Next for Liability Driven Investment?

Dec. 2, 2011 - PRLog -- Interview by Helen Winsor, Finance IQ

Rob Gardner, Founder and Co-CEO at Redington and Co-Founder of mallowstreet, joins Finance IQ to discuss changes in Liability Driven Investment.


Finance IQ: With the volatility and the near collapse of the bond market over the summer, is LDI still a long term strategy or do Pension Funds need to look at other ways to manage liability risk?

R Gardner: Let’s be clear what LDI is. LDI is Liability Driven Investing and it’s a tool set as part of the overall investment and risk management that a pension scheme needs to use in order to achieve its goal to full funding. So if we step back, most pension funds in the UK, in Netherlands and across Europe and the rest of the world are under-funded and they need to get to full-fundedness over a given period of time. One source of achieving this is contributions from the sponsor, but as we know these contributions are under pressure. The second source is from earning an excess premium from the assets. However, as we know, the gap between the assets and the liabilities is a function of a number of market risks and two of those big market risks come from the liabilities being interest rate and inflation risk.

So within any game plan that a pension scheme is putting together, it needs to think about how much risk it wants to take either from a funding ratio perspective or from a contributions at risk perspective, and any analysis, any ALM analysis will show that interest rate and inflation risk has an overwhelming impact on those two factors. Therefore LDI is absolutely an integral part of the long term strategy of a pension fund as they’re looking to manage risk. The challenge/the problem clients face is that obviously nominal yields are extremely low, real yields are extremely low and then people are asking the question is now a fair price to be paying for that protection at these levels? The problem is though that by not going ahead with LDI there is still a risk that real rates could go even lower. There’s an economic stagnation environment which could mean that nominal yields and real yields could go even lower than they are today, further impacting Pension Fund funding levels.

Finance IQ: What effect do you feel the regulatory changes in the Netherlands will have on existing and future LDI portfolios?

To download this interview in full and access the mp3 please click here:

PRLog –
http://www.ldieurope.com/Event.aspx?id=625242&utm_campaig... &utm_medium=HWOnline&utm_source=PR Log&MAC=HW_PROMO_12219.004_PR


Rob Gardner will be chairing Finance IQ’s Liability Driven Investment Conference on 18th January 201 in Amsterdam (www.ldieurope.com) and our Fiduciary Management Summit on January 25th in London (www.fiduciarymanagementsummit.com). For further information please email enquire@iqpc.co.uk or call 0800 652 2363.




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