UK - The suggestion by Goldman Sachs Asset Management (GSAM) of using a liability driven investment (LDI) strategy as a way to control the Pension Protection Fund (PPF) levy has met with mixed responses.
Alain Kerneis, author of the paper and executive director, Global Investment Strategies Group at GSAM, said: "We believe that liability driven investment makes sense for a number of reasons - as a holistic approach to the governance of pension schemes, to reduce unrewarded sources of risk and help improve the funding status of plans, as well as to help pension trustees better control their PPF levy."
However, Paul McGlone, principal, Aon Consulting, warned: "It's a rather extreme approach and I would question anyone who was using LDI just as a strategy to control the PPF levy."
McGlone continued: "The levy is not a driver to use LDI. If a pension fund is in deficit, the last thing trustees would think about would be the small percentage, such as the current 0.08%, they would have to set aside to pay it."
He added that LDI should be used for the right reasons and could be beneficial to the overall health of a pension fund.
In the report, GSAM explained how the LDI approach should comprise an interest rate hedge and asset diversification and focused on how the downgrading of a sponsoring company could affect the levy payment.
It also highlighted how additional sponsor contributions would be essential to tackle deficits and reduce levy payments.
However, it noted these could be hard to come by, particularly when a company was in the process of being downgraded.
A PPF spokesman said the organisation "welcomes any steps that schemes take to reduce the risk in the system".
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