I’d never heard of Liability-driven Investing (LDI) until it drove Defined Benefit (DB) pensions in the UK to the brink of insolvency.
I thought DB pensions were an endangered species as most pension schemes are Defined Contribution. By the way, although state sector employees receive DB pensions these are funded pay-as-you-go meaning today’s tax payers pay today’s pensioners and there is no fund to pay future state pensions. This is worrying as the proportion of pensioners to workers increases but a digression.
To my surprise there are still 5,200 DB schemes with 10 million members and £1.5 trillion under management (source FT). Indeed I am one of those members. Typically the DB funds invest in UK government bonds. This should be a safe strategy eliminating the volatility in equities. It was until LDI was invented. You will not be surprised to know that LDI is a new name for a structured product something so tarnished it needed to be re-branded. In fact it is a complex structured product, so complex that according to an FT source 99% of pension fund trustees don’t understand what they are buying. This is excellent news for the pension consultants who sell LDIs. My DB pension is pretty typical with 10% invested in equities and 90% in bonds. It has LDI content that has performed well but my latest report is dated April 2021.
The Benevolent Society of St Patrick, of which I am a trustee, has a small investment portfolio that like a DB pension scheme is needed to pay a regular income to fund our claimants today and into the distant future. Fortunately past trustees took a sensible approach and it is invested almost entirely in equities. There is some volatility and some temporary falls in income but as a long term strategy it has been a success. The income accounts for about 20% of the BSSP’s spending so a temporary drop in income is not a disaster. A smoothed trajectory of the charity’s dividends has been upwards for at least ten years.
I cannot understand why the media talk/write about gilts and then explain what it means. (They were UK government bonds printed on gilt-edged paper.) I’m old enough to have owned consols, short for consolidated annuities, undated bonds issued by the government starting in 1751. They were finally redeemed in 2015. They were considered a very safe investment and featured in many novels over the years. Novels in which consols were always good and equities usually bad.
“Given their long history, references to consols can be found in many places, including Pride and Prejudice by Jane Austen, David Copperfield by Charles Dickens, Howards End by E. M. Forster, Vanity Fair by William Makepeace Thackeray, Of Human Bondage by William Somerset Maugham and The Forsyte Saga by John Galsworthy.” (Wikipedia)
