Defined benefit pensions with Liability Driven Investments
By Work and Pensions Committee
The economic uncertainty experienced in the UK in September 2022 brought to the fore risks associated with the use of Liability Driven Investment (LDI) strategies by pension schemes. LDI strategies aim to reduce volatility in scheme funding levels by investing in assets whose value moves in the same direction as that of the scheme’s liabilities. Leverage allows schemes to do this in a capital efficient way, freeing up capital that they can invest in ways more likely to generate a higher return. However, leveraged LDI funds need to post collateral as security to the bank counterparties. Increases in gilt yields can give rise to the demand for additional collateral to be posted.
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