Letter: What future for pension funds as LDI music shuts down?

FT Money’s article on pension funds and liability-driven investing left me searching for more answers (July 2).

Final salary pension plans were encouraged to undertake this investment strategy as long-term gilt yields continued to decline from 1994 onwards.

LDI was never going to be a panacea or a complete solution for every DB fund to meet its ability to face all risks in the future. But as interest rates continued to fall, more and more systems adopted this approach, involving derivative contracts linked to long-term interest rates.

Now, some 20 years later, long-term gilt yields are up, and likely more in the way (up to 3.5%, some say).

Your article talks about a growing number of schemes that have found themselves forced to sell other liquid assets, such as high quality corporate stocks and bonds, to raise funds to meet the collateral for these LDI strategies. .

Now that the background music has stopped, how many DB pension plans have really understood what lies ahead? Were they mis-sold LDI? Or did they intentionally throw it into the tall grass in 2001?

I’m none the wiser, but if, as I think, long-term gilt yields rise further, it will affect the level of UK equities, as these funds are forced to raise new funds.

Tony Smith
Bishop’s Stortford, Hertfordshire, UK