LDI indices launched to 'improve governance and transparency'
A suite of liability driven investment (LDI) indices has been launched by STOXX and RiskFirst to aid trustees and consultants select, monitor and challenge managers.
The offering, which will be available as of 23 April, is aimed at helping defined benefit (DB) schemes address some of the challenges they face by providing an independent benchmark and investable building blocks for LDI. The indices combine STOXX's real-time fixed-income index calculation capabilities with a set of data provided by RiskFirst.
RiskFirst CEO Matthew Seymour called the indices a "major leap forward" and said they will provide "improved governance and increased accuracy through a cost-efficient solution."
According to the two providers, the three main challenges in the LDI market are governance, methodology and portfolio construction. They argue there is no transparent and objective way for trustees to determine how their LDI managers are performing for the scheme relative to competitors, and that schemes have to rely on benchmarks developed by the asset manager - meaning there is no independent oversight.
The UK-based firm's chief strategy officer Matthew Bale added: "The UK LDI market is almost £1trn. It's crazy to think that such a big market doesn't have any independent benchmarks or indices to judge performance on.
"What we have provided is a framework by which you can bring proper indices and the right governance structure to the UK LDI market", he continued. "Not a lot is going to change from the perspective of the consultants and asset managers, because it's really about delivering the right governance structure to the pension plan. Pension trustees will start seeing more comparability of LDI, and manager performance should become more understandable and more standardised."
STOXX director of global asset owners Muhammad Ashar commented some trustees are hesitant in going down the LDI route because the framework is very vague, and they cannot replicate the good model that they see in equities.
"Therefore, through this product, not only will the existing LDI mandate become well governed, but more trustees will be encouraged to adopt LDI," he said.
- The new product will attempt to tackle market inefficiencies using transparent investment tools.
- STOXX will calculate a range of indices based on 12 profiles, capturing member type, duration, type of indexation (pre- and post-retirement), interest rate and inflation sensitivity and tax-free cash component of typical UK pension schemes.
- The indices track the performance of corporate and government bonds denominated in sterling. They function as flexible, investable building blocks for LDI portfolios.
- Four different sets of indices are provided: nominal bond indices, inflation-linked bond indices, blended indices and non-gilt indices.
- They are constructed using a proprietary cashflow matching model that incorporates best-in-class LDI techniques.
- It uses data from over 4,000 UK pension scheme liability tranches.
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