Blackrock Defends LDI Strategies – Markets Media

Much has been written in recent days about liability-driven investment (LDI) strategies in the UK pension industry and the role played by asset managers, including BlackRock.

We are setting the record straight on the goals of these strategies, on recent events in the UK markets and our duty to those who manage the money of those who save for retirement.

Help provide savers with financial security when they retire

The money we handle is not ours. It belongs to people from all walks of life who trust us to act in their best interest. Defined benefit pension plans have to manage their investments so that when their members reach retirement, they can meet those expectations.

One of the many challenges these pension plans face is how to ensure that the value of their investments matches the amount they must pay retirees. The value of future pension payments is prone to fluctuations with the rate of measures such as inflation and bond yields, requiring pension plans to mitigate or hedge those risks if they can. The amount retirement plans are expected to pay their members in the future are also known as liabilities, and so-called “liability-based investments” or LDI strategies aim to match the value and time horizon of your current assets. with future liabilities.

Over the last few decades we have been in an environment of low and declining bond yields in the UK. This market environment has meant that the present value of pension fund liabilities, the amount of which grows as bond yields fall, was often greater than the value of their current assets (i.e., pension funds). pension had a deficit, they were in deficit).

One way that retirement plans minimize potential shortfalls is by using some of a given fund’s assets to borrow capital, so that the scheme can invest more to increase the value of its current investments for the benefit of future retirees.

This has been standard practice for many defined benefit retirement plans in the UK for over 20 years.1.

As some pension funds have fewer assets than liabilities, there is a need for schemes to use loans to gain both the necessary exposure to liability-sensitive assets and exposure to growth assets such as equities to help make up for those shortfalls.

Pension managers and their consultants determine their own objectives and asset allocation, and therefore the amount of exposure to LDI strategies. Asset managers, for their part, advise on how to structure and implement those strategies on behalf of their clients, adjusting them so that they remain effective in changing market conditions and meet the objective of the pension funds.

What happened between September 23 and 28

As bond yields rise, asset managers like BlackRock periodically ask pension funds to increase assets in their LDI strategies, if they want to keep the same exposures.

We are not a trading counterparty to these risk mitigation strategies.

With UK government bond yields rising throughout 2022, asset managers have made such requests dozens of times this year.

But the process takes several days to run, typically more than a week from start to finish.

Typically, adjustments to required assets fluctuate gradually over time, and the amount of excess collateral is more than sufficient to cover requirements based on previously observed market movements. However, due to the extraordinary moves in UK rates and inflation-linked bond markets over the last week, swift action was needed to protect LDI strategies.

What happened from September 23, up to the time the Bank of England announced that it would buy long-term UK government bonds to stabilize the market, was that the markets were going down so fast that there just wasn’t enough time to get the necessary assets. in the LDI funds quickly enough given the time that process takes.

In these circumstances, BlackRock took steps to protect our clients’ interests and, ultimately, the value of the investments on which future retirees depend. We reduced leverage on a small amount of multi-client LDI pooled funds, acting prudently to preserve. capital of our clients in extraordinary market conditions. We sold some assets in a small number of those funds, thereby reducing leverage and exposure.

BlackRock’s buying and selling of LDI funds was not stopped (or frozen), nor did BlackRock stop trading UK government bonds.

It is also important to note that while some pension plans have faced calls to increase their assets in their LDI strategies, their solvency was not at stake, given the long-term nature of their liabilities. The rise in bond yields this year, and indeed in the days leading up to the Bank of England intervention, will have improved the funding status of most plans.

The Bank of England’s action means the pension and asset management industries can work together to protect the value of pension investments and restructure the funds for the ultimate benefit of savers who depend on those funds for their retirement.

BlackRock is committed to helping our clients achieve the best results for savers

While pension funds will always want to manage their investments with liabilities in mind, recent moves in the UK market may lead them to consider how their strategies should evolve.

BlackRock’s purpose is to help more and more people experience financial well-being. We are committed to supporting the UK pension industry as they work through this period of market volatility, to deliver the best results for those saving for retirement.

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Source: BlackRock

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