Bespoke Liability Driven Investment (LDI): increased transparency, flexibility and accuracy 

• Cashflow generative assets with predictable income and coupon distributions structured to meet Scheme cashflow needs.
• Return generating assets to ensure efficient use of capital and support Scheme’s actuarial funding requirements
• Funding stability via full & robust hedging of Scheme liability risks and a considered approach to liability discount rates
• Crisis resilience through a comprehensive collateral management framework

CDI strategies typically integrate the following asset classes:

Corporate Bonds: Diversified and high credit quality assets designed to provide predictable income generation and achieve predictable returns above risk-free rates.

Growth Fixed Income: Typically higher return generating assets designed to access alternative fixed income return drivers and provide diversification against corporate bond exposures.

Liability Driven Investments (LDI): Provides predictable income generation whilst managing interest rate, inflation, and future cash flow reinvestment risks.

The liabilities are a fundamental pillar of strategy design and so close collaboration with the Scheme Actuary is required to accurately construct a liability benchmark to reflect future benefit payment patterns at the outset, and to then carefully monitor the accuracy of that benchmark over time. A discount rate that reflects the investment grade corporate bond assets (as well as gilts) enhances this approach.

As Schemes becoming increasingly mature and cashflow negative ensuring the cashflow match and liability hedge are suitably accurate is critical to ensuring predictable outcomes for the future. Integration of assets across LDI, corporate bonds and growth fixed income is crucial to ensuring this accuracy is achieved and maintained.

As Schemes de-risk, investment strategies inevitably pivot away from higher return seeking assets (e.g. equities) towards growth fixed income assets. Ensuring Schemes have access to the full spectrum of opportunities across the corporate bond/growth fixed income universe allows Schemes to access a wide range of return drivers and appropriately diversify the investment strategy away from any one specific return source.

This requires a well-structured LDI portfolio to support an optimal allocation to income-generating assets.  The LDI strategy should manage rebalancing, redemptions/subscriptions and collateral management in a robust and efficient manner.

No, in fact CDI strategies are typically a very sensible stepping stone where risk transfer is a medium to long-term objective. With a  priority focus on corporate bonds, growth fixed income and high levels of hedging, CDI strategies are, in many cases, a close reflection of insurer’s own underlying investment strategy. In many cases, this makes a CDI strategy a sensible hedge of insurer pricing and an attractive proposition to insurer’s looking to establish premium price lock portfolios and to take on some/all assets in-specie as premium delivery.

We have successfully implemented CDI strategies for Schemes using either approach. Our wide range of pooled funds incorporate a number of income and principal distributing share classes which invest in LDI, corporate bond and growth fixed income assets and can facilitate the construction of an effective CDI strategy designed to match the Scheme’s specific requirements (liability profile, funded status, Trustee risk appetite etc).

Whilst Pooled LDI funds are perfectly suited to the right size scheme, the use of a bespoke mandate for some or all asset classes is an attractive option for Scheme’s with assets over c.£100m and brings significant additional benefits including:

Whilst not essential, there are synergies to managing LDI and corporate bonds collectively, in particular where bespoke mandates are being utilised. Effective communication and coordination are key to a successful CDI strategy. By having LDI and corporate bond teams working closely together, pension schemes can streamline processes and enhance risk management. It also enables real-time insights. When credit strategies or asset holdings change, portfolio managers can quickly adjust the hedge profile. This was particularly valuable during the Gilt market crisis when rapid adjustments were necessary. However, we believe there is a strong argument for multi-manager mandates in certain asset classes such as longer-dated global bonds and growth fixed income, so a blended approach may be optimal.

With Schemes becoming increasingly well-funded, mature and cashflow negative, tailoring investment strategy to support these changing dynamics is crucial. CDI strategies offer Schemes a practical and secure solution which can be implemented through a range of approaches.

If you share a small amount of information about your current Scheme arrangements e.g. funding position, liability profile and current investment structure, we’ll offer you our proposed CDI solution, associated costs and an indicative transition plan to help weigh the pros and cons.