Will LDI ever take off for defined contribution?

Alan Gander: There is an awful lot of complexity regarding LDI, there are so many ups or downs and different ways it can go. I just wonder how any individual could even take that on board.

Laura Brown: I think you are right – it will be in a different form.

Gander: How do people know how much money they are going to have in retirement? How do they know when they are going to retire? We have people working in their early seventies, so they are still working and they are still not aiming to retire. They will just work until they drop.

Celene Lee: We have not paid necessarily enough attention to the fact there are two aspects to it: there is holding LDI to hedge the valuation and there is also actually needing it to give you an income.

The LDI pooled funds of this world, for example, do not necessarily throw out income, which means you might have to go back to the bond world where you get a bit of coupon from it - albeit it is not perfect because obviously coupons and redemptions are lumpy.

Simeon Willis: We have moved into a much more ambiguous world, where the role of something like LDI or similar tools is much more vague, in terms of the benefit for members. It was not used before; I cannot see it really catching on now. I cannot really see defined contribution members ever going into an LDI fund. There is not a defined liability.

Having to continually manage your drawdown fund seems like a lot of hassle

Howard Kearns, SSGA

Mark Versey: We talk about four outcomes for our customers: they either want to beat the bank, so require steady growth; they want to protect the cost of living, so that is inflation-linked growth; or they want high income, typically in retirement. And then the other outcome is for institutions to beat liabilities, which is what we were speaking about before. 

LDI does not work for the first three which relate to DC consumers, because there is no liability now that compulsory annuities are no more. The liability is something completely different and an outcome-oriented solution is required instead.

Lee: I really like that kind of approach and thinking, actually, and I think it applies in the same way to defined benefit schemes as well; just to think about outcome-focused strategy.

Going back to your point about target date funds in the US, I guess it is more akin to a DB pension scheme derisking the overall strategy perhaps, rather than adopting LDI, so that over a period of time as you get nearer to retirement you just reduce the risk of your portfolio rather than necessarily adopting LDI, because individuals do not have liabilities and such.

Howard Kearns: Do you not think that a lot of people will still buy annuities? I think a good number of people will. Maybe not when they retire, maybe they will draw down for a while and burn through some cash, but then they reach 75 and they buy an annuity. Having to continually manage your drawdown fund seems like a lot of hassle to me.

Lee: That is the thinking, isn’t it, that people will still buy an annuity. A lot of the surveys are quite misleading because they ask people, ‘What are you going to do?’, and they will say, ‘Oh, 80 per cent of them are not going to buy annuities’. And yet actually, you have to almost keep asking them. What they probably mean is, ‘I probably will not do it immediately’. You have to ask them again next year, ‘Are you still going to do it?’

Mike Roberts: Well, I was just thinking about my parents: when they first retired, they spent a lot more money then than they do now, now they are in their mid-eighties. So that sort of flexibility actually would have been very good for them, to take more cash out initially and then buy an annuity at some later stage when it is needed most. Though the potential issue of long-term care costs needs to be considered.

Gander: I think totally differently as a trustee of a pension scheme than I do about my own personal finances. It is almost like chalk and cheese.

If I were to sit down and explain equities to someone who does not know about investment, I think I could do it reasonably well. If I started to talk about derivatives, I would not have a clue, really. And I do not think that the person listening to me would have a clue either. Because it is just complex, and it is gobbledygook, and that is what LDIs are all about.

It is just complex, and it is gobbledygook, and that is what LDIs are all about

Alan Gander, AMNT

It has taken us 18 months. We have had numerous training sessions, we have seen several fund managers, it has been explained to us umpteen times, and yet there is still an element of doubt in people’s minds saying, ‘Well look, is this a really good thing? Is it that good?’

Kearns: I think it has improved. I remember when I first moved across from consultancy to banking and we would go out there with overly detailed pitch books; it was the equivalent of trying to sell a car by telling somebody how the internal combustion engine works. It was not about the outcome, it was about how all of the bits in the middle worked.

Roberts: Did you get many people falling asleep in those meetings?

Kearns: It was a compliment if only one fell asleep. I think we have improved since then. More consultants have moved across and they have come from a background where they know what trustees want to hear. Maybe that has something to do with it.

This roundtable was chaired by Pensions Expert reporter Tom Dines