UK - F&C Asset Management's call for greater use of liability driven investment strategies among local authority pension funds has been rejected by industry insiders.
Richard Watts, F&C’s co-head of asset and liability management and insurance, argued it was “reasonable and logical” to expect the government to force some financial discipline on local authority pension schemes.
Too often we read accounts of local pension schemes running large deficits which occurred as a result of taking on too much investment risk without proper regard to the outstanding liabilities,” said Watts.
But F&C’s argument was rejected by Con Keating (pictured), principal at the Finance Development Centre.
“If you implement LDI it will result in a larger tax bill because LDI is more expensive then the options already in force,” he cautioned.
Anton Sweet, fund and investment manager at the £925m Somerset County Council, said F&C’s arguments would have been more suitable in 2000, when most of the schemes were still 100% funded.
This was no longer the case, he warned. “If you’re not 100% funded and you go down the LDI route, you will be needing a vast cash injection straight away, where’s that cash going to come from?”
F&C complained that only a few out of 116 local authorities in the UK had decided to use LDI strategies.
But Sweet argued the majority of local authorities had already embraced the LDI philosophy, albeit with equity investments rather than bonds.
Sweet did not subscribe to the philosophy that an LDI strategy could only be achieved through bonds. Bonds would incur a huge increase in cost, to be met by council tax payers, he explained.
According to Sweet, relatively mature local government schemes intending to remain open-ended, apparently the majority, would be better off with a largely equity-based asset mix.
“Most local government schemes have had an asset liability study and follow an actuary’s advice on how best to meet their own liabilities,” he continued.
“While we are not using what a lot of people think LDI is, we are using the basic principles of LDI which is looking at your liabilities and coming up with a good asset mix to make sure that you meet them.”
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