LDI fund

Pensions - interest rate risk management - pensions risk.

Liability Driven Investment fund.

A leveraged investment product designed to hedge interest rate risk in pension funds.

LDI funds and collateral

"Liability Driven Investment, or LDI, is a way of investing that by convention gives a multiple exposure to gilts. So, for every £1 invested in LDI, a [pension] scheme could receive the equivalent of a £3 investment in gilts. This is known as leverage but is accessed through specialist funds, with careful risk controls and pension scheme trustees must take professional advice.

Schemes have been using LDI to manage their funding risk. This is because it causes their asset value to move in a similar direction and magnitude to the value placed on their future pension obligations. It therefore avoids large increases in the funding deficit.

LDI is not used to speculate on market movements or to try and generate excess returns. The leverage of LDI allows schemes to retain some of their assets in growth seeking assets. The additional returns on these assets should contribute to deficit reduction in the longer term.

A requirement of LDI is collateral. When there is a fall in government bond yields (known as gilt yields) schemes receive collateral payments, when yields increase schemes must provide additional collateral. The use of collateral is commonplace in financial markets and ensures that leverage levels remain within pre-agreed ranges to manage the operational risks of using leverage."

Actuaries in [the UK] government - Liability Driven Investments - 24 October 2022.

See also

• Actuary
• Asset-liability management
• Collateral
• Deficit
• Interest rate risk
• Liability driven investment (LDI)
• Leverage
• Pension scheme
• Portfolio
• Trustee
• UK LDI crisis

Other resource

• Actuaries in government - Liability Driven Investments - 2022