Use of Liability-Driven Investments (LDI)

You may have heard the term ‘Liability-Driven Investments (LDI)’ in the press recently and be wondering how it affects the Plan and your pension. We thought it would be useful to explain a little about what LDI is and why the Plan uses it as part of its investment strategy to manage its funding position.

What is LDI and why has it been used by the Plan?

Volatility in interest rates is a key investment risk for defined-benefit pension schemes (including this Plan) and has the potential to cause large swings in the Plan’s funding position, if not appropriately managed. Pension plans (including this Plan) have been using LDI to manage funding risk. This is because the value of LDI assets moves in a similar direction and magnitude to the value placed on the Plan's future pension obligations, known as the liabilities: i.e. when interest rates fall the value of liabilities rises and the value of LDI assets also rises, and when interest rates rise the opposite is true. It therefore avoids large swings in the funding deficit. The LDI strategy is designed to significantly reduce and manage the volatility in the Plan’s funding position and maximise the probability of paying benefits as they fall due.

The Trustee reviews the effectiveness of the LDI strategy and can confirm that it is performing as intended.

The gilt market crisis and misinterpretation of LDI

The turmoil experienced in gilt markets during September and October 2022 was unprecedented, which has led to negative media portrayal of LDI strategies in general terms. This view largely ignored the beneficial impact of LDI during other periods of market stress (for example during the Eurozone credit crisis, Brexit and Covid-19). Without LDI holding during such times, funding positions of pension plans would have suffered severely.

Reviewing the Plan’s investments – including LDI

The Trustee continues to monitor their investment holdings regularly and take appropriate professional advice on their investments. This also applies to the assets within the LDI portfolio.