© Reuters. FILE PHOTO: A general view shows the London skyline, in London, Britain December 24, 2020. REUTERS/Hannah McKay/File Photo
LONDON (Reuters) – The London Pensions Fund Authority (LPFA) last year ditched its liability-driven investments (LDI) – the strategy at the heart of a UK pensions crisis – to cut risk and costs, a spokesperson for one of Britain’s largest local government pension schemes said on Friday.
LDI are designed to protect pension schemes against wild moves in gilts – British government bonds – but fell short following exceptional rises in yields after Britain’s mini-budget in late September.
Many schemes were forced to dump assets to meet margin calls – or demands for collateral – and the Bank of England had to step in last week to stabilise the market.
“In the past, we did have some LDI exposure but have been steadily reducing it,” the LPFA spokesperson said by email.
“By 31 December 2021, we no longer had any exposure to the LDI and so were unaffected by the recent collateral calls.”
The decision was taken by the LPFA Board to remove the LDI position as part of the scheme’s three-yearly review of its investment strategy, the spokesperson said.
“As well as risk reduction, it was done to reduce cost and complexity,” the person added.
LPFA has 6.9 billion pounds ($7.8 billion) in assets. It manages pensions for 92,000 people across 124 employers.
It said in its 2020/21 annual report that it had 416 million pounds invested in LDI, in a programme “tailored specifically” for the pension scheme.
If the LFPA’s LDI strategy were still live, it could have faced hundreds of millions of pounds in emergency collateral payments in recent weeks, one industry source said.
Local government pension schemes in England and Wales have 342 billion pounds in assets.
LPFA was rare among such schemes in deploying LDI strategies, which are more popular with private sector schemes seeking to match assets and liabilities, sources say.
Like many pension funds, however, local government schemes do invest in assets such as real estate and infrastructure, which are harder to sell in moments of acute market stress.
Local government schemes have “huge exposure to illiquids, up to 35% of AUM (assets under management), but 0% exposure to LDI,” said Christopher Sier, CEO of fintech ClearGlass.
($1 = 0.8847 pounds)