The Lemon Fool

https://henrytapper.com/2016/12/12/brea ... orthodoxy/

The article stops short of calling us “self-serving”, but no-one who understands the current craze for LDI will miss the implication of O’Higgins words. Liability Driven Investment has its foundations in a gilts based valuation system and LDI is a monster of the asset managers and consultant’s invention.

Rob

MunroMan wrote: Liability Driven Investment has its foundations in a gilts based valuation system and LDI is a monster of the asset managers and consultant’s invention.

There's a certain amount of sense in selecting investments where the cash flows by period approximately matches the cash flows of outgo. Since the adoption of QE with interest rates of next to nothing, this has the unpleasant side effect of making your pension scheme extremely expensive by locking in to assets with a derisory return.

It would be better to exploit the other side of the risk versus return debate and test whether it was possible to accept higher risk as a trade off for higher returns. This is what is happening by default when the apparent cost of defined benefit schemes forces their closure. The investments chosen by those now responsible for investment of the equivalent sums in defined contribution schemes being more equity related.

Valuations should be a measuring rod. You could invest in equities to get the higher return and still value using gilt rates of return. Most of the time you would generate a healthy running surplus from the risk premium over gilts. Periodically you would get a valuation report that an equity crash had left the pension scheme formally insolvent, or that the future contribution rate needed to be much higher.