Defined benefit pension schemes and insurance companies face certain liability risks and investment-return requirements when meeting their payment obligations. This is where liability aware investing comes in, providing a framework within which they can proactively manage these aspects.
Liability aware investing is a strategic priority at abrdn. We have been diligent in creating an effective platform to ensure that we can work in partnership with you to deliver the solutions and services you seek.
We have an enviable depth of capability in both liability driven investment (LDI) and fixed income (both liquid and illiquid instruments). This, combined with our insurance heritage, places us ideally to help you with your LDI requirements. It also positions us to guide you to your endgame, be that self-sufficiency or buyout-ready solutions.
Working in partnership with defined benefit (DB) pension schemes to deliver solutions to help them achieve their goalsNavigating to your DB endgamearrow_forward
What we offer our clients
Our Liability Aware fund range includes a range of pooled fund “building blocks” that allow solutions to be tailored to the needs of small and medium-size pension schemes.
- Our Integrated Liability Plus Solutions (ILPS) fund range provides liability hedging plus exposure to a range of growth engines in a single fund, making efficient use of collateral.
- We are launching a range of “hedging only” LDI profile funds – two average (nominal and real) and two long (nominal and real) profile funds – to allow schemes to increase their hedging precision as they approach full funding.
- For maturing pension schemes where having to meet outgoing cashflows becomes an increasing need, we are launching a number of cashflow-aware credit solutions. Our range of Liability Aware CDI (Cashflow driven investment) funds are available to investors. Please see below for more details.
Integrated Liability Plus Solutions (ILPS)
- We developed our ILPS funds to help our defined benefit pension clients control both asset and liability risks while maintaining their return targets.
- ILPS is a unique, innovative approach to liability management that integrates a cash-efficient return engine with leveraged liability hedging within a suite of single pooled funds.
- Since 2005, we have successfully used a similar approach to restore our own Standard Life Staff Pension Scheme to a sustainable surplus.
How does ILPS work?
Each £1 in an ILPS fund has two objectives:
- Hedging Portfolio - to provide c.£2 protection (i.e. hedge) against changes in the value of liabilities arising from movements in interest rates and (in the Real Funds) inflation expectations; and
- Growth Portfolio - at the same time, to seek a return over the long term on the £1 invested in the portfolios.
- Liability Aware Absolute Return II Fund (LA AR II), targeting cash* + 3% per annum over rolling three-year periods.
- Liability Aware Absolute Return III Fund (LA AR III), targeting cash** + 5% per annum over rolling three-year periods.
- Liability Aware Equity Fund (LA Equity), a new addition to our ILPS fund range, targeting a return in line with passive global equity markets (MSCI All Country World Index).
*cash is defined as 3-month LIBOR
**cash is defined as 6-month LIBOR
Liability Aware CDI (Cashflow driven investments)
Following closure to new members, many DB pension schemes are now becoming cashflow negative, i.e. where benefit outgo exceeds income from contributions and investments. Many schemes are therefore paying more attention to arranging their assets to deliver the income required to pay benefits, often referred to as “Cashflow Driven Investment” or “CDI”.
For larger pension schemes targeting self–sufficiency, a segregated approach may be appropriate; however, for small to medium sized pension schemes a pooled solution may be more suitable. Our Liability Aware CDI fund range can be used by pension schemes to create a bespoke cashflow payment profile that fits their particular scheme’s future cashflow requirements after allowing for contributions and income from other assets such as private debt or real estate.
The Liability Aware CDI fund range consists of five three-year “buckets”, allowing pension schemes to tailor their holdings to meet their cashflow requirements.
They are a series of maturity dated cashflow funds, managed on a buy & maintain basis that look to deliver a relatively predictable series of cashflow from a portfolio of nominal corporate bonds – with coupons and redemption proceeds paid out over time. The funds are expected to invest in nominal GBP corporate bonds only at outset.
These funds will be managed by our Fixed Income team. The team is very experienced at managing buy & maintain credit and has a strong track record of avoiding downgrades. For more information please visit our Fixed Income site
What is CDI?
A cashflow driven investment (CDI) strategy selects assets which provide contractual income to match, as far as possible, the future expected cashflow requirements of the pension scheme. By matching cashflows, the assets are intended to be held to maturity and so provide a greater level of certainty over return.
CDI has been employed by insurance companies to back their annuity books for a long time. Although pension schemes are not bound by insurance company regulations, CDI is increasingly being seen as an appropriate strategy to provide a stable, long-term and low-risk solution for a maturing scheme, reducing reliance on the sponsor.
CDI works best when integrated with Liability Driven Investment (LDI), particularly as cashflow matching of long-dated liabilities with credit may not be possible at the outset or may be only partially affordable. LDI can also be used with the aim to provide inflation protection, where insufficient inflation-linked credit assets are available.
Although a “Buy and Maintain” style of investing is at the core of CDI strategies, reinvestment risk, liquidity risk, default risk and liability experience should be monitored over time with the strategy updated accordingly to ensure it remains fit for purpose.
For further information on CDI, including how to construct a CDI portfolio and the differences with buy-and-maintain credit, please see our articles below.