F&C Asset Management says that the British Government should help local authorities in making full use of Liability Driven Investment (LDI) in order to balance their assets and liabilities. “As private pension schemes are moving to adopt sophisticated risk management techniques, it seems reasonable and logical to expect that it is simply a matter of time before the government forces some financial discipline on local authority pension schemes,” says Richard Watts, co-head of Asset & Liability Management and Insurance at F&C Asset Management. “It is in the government’s interests to ensure that the investment policies of public sector pension schemes are prudent enough so that the taxpayer is not footing the bill unnecessarily.
Local authorities need to re-assess their investment risk strategies carefully. Too often we read accounts of local pension schemes running large deficits which occurred as a result of taking on too much investment risk without proper regard to the outstanding liabilities”. Watts says that it is the government’s responsibility to advise local authorities to use LDI strategies. “So far, only a few out of 116 local authorities in the UK have decided to use LDI strategies in order to address the issues of funding deficit and risk,” he says. “LDI strategies allow funds to hedge the risks which are unlikely to produce systematically positive returns and also make bigger allocations of the risk budget to asset classes offering superior returns.”