LDI: the better mousetrap that almost broke the UK
A pension meltdown forced the Bank of England to intervene in gilt markets on Wednesday. Executives told the Financial Times that markets barely dodged a Lehman-Brothers-like collapse – but this time with your mum’s pension at the centre of the drama.
Problems with “pension plumbing” are what caused the mess. The culprit is said to be a popular pension strategy called liability-driven investing, or LDI.
Leverage is a key element of many LDI strategies, and are basically a way pension funds can look like they’re an annuity without making the full capital commitment of becoming one. As the drama unfolded we talked to some analysts and pensions managers who weren’t directly involved with the UK meltdown, but are experts in LDI and liability-matching practices. Here’s a summary of what they told us:
This story originally appeared on: Financial Times - Author:Louis Ashworth
