Investment Insights: What basis should pension schemes be hedging over time?

Read our briefing note for in-depth analysis

The performance of pensions schemes' Liability Driven Investment (LDI) strategy has been a crucial factor in their success in recent years.

By providing protection against falling yields, leaving growth assets to drive a reduction in deficit, LDI has become the foundation of defined benefit pension schemes' investment strategies.

"Liability Driven Investment has become the foundation of defined benefit pension schemes' investment strategies"

LDI strategies should help schemes to minimise their exposure to movements in interest rates and inflation. However, it is important for schemes to be comfortable with what their LDI portfolio is aiming to achieve over the long-term. 

Our briefing note explores how the design of your LDI portfolio can have a significant impact on how successful your liability hedge actually is.

At a time when many DB pension schemes are shifting their focus as they look at the road to maturity, we believe LDI portfolios should be designed to be flexible to changes, while keeping complexity and governance requirements to a manageable level. 

As the scheme’s funding position and maturity changes, the LDI portfolio should continue to achieve the objectives which it was designed for.