Liability Aware Investing

Objective-Driven Investing: Evolving the DB Mindset

Our purpose at LGIM is to carefully manage the risk that pension funds need to take in order to pay pensions. Over the past 15 years we have become the UK’s largest LDI manager and currently help 32% of all DB schemes1 manage their major risks (inflation and interest rates) with LDI strategies. We have also been helping many schemes use different strategies to bridge their funding gaps.

In recent years, LDI has focused schemes on hedging their interest rate and inflation sensitivity, and implementing diversified growth portfolios. However, many schemes are trying to juggle multiple managers, creating a governance strain for trustees and pension fund managers, and making holistic risk management at the scheme level a challenge. There is also a potential performance drag due to inefficiencies. To compound matters, this is happening amid a backdrop of changing regulation and schemes’ increasingly challenging balancing act between meeting short-term cashflow needs and maintaining sufficient assets to pay pensions in the long term.

To help trustees of DB schemes find solutions to their evolving challenges, we have developed a simple framework of reference for their journey towards self-sufficiency or buy-out. We have focused our own approach on the objective of every scheme: what should we do now to pay pensions today, while still having sufficient assets to reach the desired endgame? Our framework is called the Liability Aware Investment framework (the ‘LAI framework’) because every decision trustees need to make is always with reference to their scheme’s liabilities. We describe it as an evolution, not a revolution. It simply requires trustees to look across their whole scheme and seek marginal gains in every investment decision they make.

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