Sonia discounting and the Whac-A-Mole world of LDI

Imagine you’re a trustee of UK defined benefit pension scheme and you’re in this quarter’s investment committee meeting.  Just after the scheme secretary has gone though the actions log and before you hear your consultant’s latest investment idea, your actuary presents an update on your funding position.  If you are like most UK pension schemes, … More Sonia discounting and the Whac-A-Mole world of LDI

ALM strategies: an integrated approach to investment and funding

The challenges facing pension trustees and corporate sponsors are well understood, but the fundamental problem that both sides must ultimately solve is that in order to secure and protect member benefits, deficits have to be repaired before all member benefits are paid out; this is the key ALM challenge facing the UK pensions industry and … More ALM strategies: an integrated approach to investment and funding

Impact of CSA terms on swap valuations

One of the many after-effects of the financial crisis is that derivatives dealers have changed their pricing practices to take account of Credit Support Annex (CSA) terms.  Because collateral terms often vary from bank to bank, these changes are making it difficult for pension schemes to compare pricing among dealers, manage their counterparty exposures, and … More Impact of CSA terms on swap valuations

Inflation-linked swaps with regulated UK utility companies and PFI projects

“When the seller is ready, a buyer will appear.” Even in today’s negative real yield environment, demand from pension schemes for inflation-linked assets remains strong.  Because they offer liability matching characteristics, pension schemes, for risk management purposes, have continued to pay, what they and their historical models, would consider to be expensive prices for inflation-linked … More Inflation-linked swaps with regulated UK utility companies and PFI projects

Carry and rolldown: the hidden cost of waiting to hedge

It may seem counterintuitive, but it is possible to invest in low yielding assets and generate attractive excess returns. Consider, for example, Japanese Government Bonds (JGBs). Since 2002, 10 year JGBs have yielded a measly 1.22% p.a., but their total returns exceeded yields by almost 1.00% p.a. with a volatility of just 3.88%. This equated … More Carry and rolldown: the hidden cost of waiting to hedge