LPFA adopts ALM to boost investment dynamism

Defined benefit schemes have begun to look more closely at asset-liability management to make faster and more appropriate investment decisions, but others have questioned the value of checking models too frequently. 

“This [move] will further enhance the fund’s dynamic approach to risk, besides facilitating the investment and asset allocation decisions,” stated the 2013 annual report. 

Once implemented, the scheme hopes to be able to stress-test investment decisions and “anticipate events and improve [its] ability to prepare for the unexpected”, the report continued.  

The £4.7bn fund reports on its liabilities weekly.

Its interim chief executive Susan Martin said: “This past year we have focused on understanding our liabilities, not just from a data point of view, from what is happening with longevity [and] what is the profile of our members, [but] to what is happening in the economy.  

“What we can do each week is match our liabilities against our assets. So we can see how they are doing, which means we can select our investment strategy [accordingly]. It is a very dynamic arrangement, which I think is unusual in local government."

The scheme has seen its assets grow by £427m during the year, according the annual report. 

Gavin Orpin, head of trustee investment consulting at LCP, said asset-liability models can allow schemes to make better and faster investment decisions.

He added, though, that such models should be used when appropriate; for example, when funding levels change. “It is less time-based and more about looking at circumstance and market situations," Orpin said. 

Schemes can use asset-liability modelling when hedging decisions are being made and when schemes are trying to introduce a new asset class.

This is an ongoing process. “Every quarter we look at it to see if it is in the appropriate format and if changes need to be made”, Orpin added.

“Pension schemes are long term. If you look at it too often, you can subtract value, because you make too many changes,” he said. “It may cause you to make changes that are inappropriate.”

Yves Josseaume, partner in the asset-liability modelling team at Aon Hewitt, said as technology develops and modellers are put in ‘the cloud’, schemes will have the ability to look at them daily. 

"The more frequently you can monitor the financial health of the scheme, the more frequently you can see opportunities in the investment market and adjust asset allocation," he said.

"The financial markets are moving daily, and intra-daily, we can't just close our eyes for long periods of time," Josseaume added.  

¹Original version of this article published on October 23 incorrectly stated this proportion as 3.5 per cent.