EUROPE - Liability driven investment can bring significant benefits to pension funds looking to better manage their risks, but trustees should be realistic about the impact it can have, warned Lane Clark and Peacock partner Phil Boyle.
“LDI helps funds identify and quantify all their risks, and then goes a step further and helps them change or control separate areas of risk to better suit them,” said Boyle (pictured).
“It’s great and many pension funds are buying into it.”
However, he stressed things that seemed to good to be true, often were.
“It’s very hard to destroy risks,” said Boyle. “So while some people think those risks have just disappeared, it is likely they will just pop up elsewhere. Trustees need to understand that,” said Boyle.
LDI is an ideal way for pension funds to protect themselves from a fall in yields - it helps funds reduce unrewarded risks and provides stability of its funding level. But, said Boyle, it also locks in low bond yields and can be oversold.
“So there is a downside to every upside,” he said.
LDI has received increasing interest from pension funds across Europe, although as yet most of the funds to have taken the plunge have been UK-based.
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