| LDI strategies surf the regulatory wave |
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| 18.06.2006 | |
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LDI strategies are being adopted by European investors where governments are pressuring investors to close their pension deficit, according to a survey of 214 European pension funds conducted by JPMorgan Asset Management. One in five European pension funds have already resorted to some sort of LDI strategy, and one out of three expect to implement one in the future. LDI strategies, which are designed to strengthen the match between pension assets and liabilities, are mostly being implemented in countries where the legislation requires liabilities to be marked-to-market, which renders schemes much more vulnerable to the creation of deficits. It is the case of the four countries that are leaders in this field: The Netherlands, Denmark, Sweden, and the United Kingdom. In The Netherlands, 66% of pension funds say that they already implement, or are ready to implement such strategies. This proportion is down to 53% in Denmark and Sweden, while it is 44% in the UK. In Germany and Switzerland, where the marked to market valuation is not mandatory, pension funds are generally less inclined to resort to this type of strategy, but remain quite interested. "We have been surprised to conclude that a third (30%) of the schemes plan to put in place this type of strategy, while almost none (3%) have already done so", said Karin Franceries, head of client solutions Europe at JPMorgan AM. Duration and derivatives The use of LDI strategies generally extends the average duration of an investment portfolio. As a result of LDI-inspired strategies, JP Morgan estimates that the average duration in Europe is likely to go from 9.3 years today to 11 years in the future. It's in The Netherlands and in the United Kingdom that the increase in duration is set to be the strongest, going respectively from 10.5 to 13.8 years and from 15 years to 17 years. To achieve this, a majority of pension funds are ready to use a wide variety of assets, among which derivatives such as swaps, which were generally not considered five years ago. Once again, there are substantial regional differences according to JP Morgan AM. The UK, which reported the highest percentage of schemes with a pension deficit (74%) across Europe, were the most willing also to use leverage to address a funding deficit. "However, it is also here we see the greatest resistance to using the derivative instruments required to execute an LDI strategy. This is in direct contrast to Denmark, Sweden and the Netherlands where the use of derivatives is widely accepted, with more than one in five schemes in these markets using derivatives specifically for liability matching purposes." Also, JPMorgan said that UK schemes prepared to use derivatives usually prefer an asset manager to execute the over the counter transactions on their behalf rather than doing it directly. J.L. |
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