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London’s SAUL director questions LDI costs

UK - David Bennett-Rees, trustee director at the Superannuation Arrangements of the University of London pension fund, has queried the costs involved in liability-driven investing.

He said in his experience trustees felt LDI, although a useful tool, was probably more worthwhile for providers than clients.

Speaking at the UK & Irish Pensions and Investing Summit in Dublin today, he argued that complex derivative and interest-rate swaps are not well understood by trustees. He added: "Trustees feel the cost of some of these instruments is not worth the money being paid to advisors."

"It is often forgotten that it's the trustees' duty to safeguard the assets and pay pensions," he explained.

He cited the example of pension fund tenders seeking returns of LIBOR + 4%, which bearing all the costs in mind might not be cost effective. He said: "Is it really more worthwhile for the investment provider? This worries trustees."

Underfunded schemes needed to generate returns, which they couldn't get with bonds but via equities and hedge funds and so on, Bennett-Rees told delegates.

He pointed out that 50 years ago insurance companies tried to immunise their portfolios in exactly the same way pension funds are being told to now and that this approach was superseded by the cult of the equity espoused by George Ross-Goobey.

SAUL's strategy was to focus on risk-reducing assets and risk-enhancing assets. "You have to be broadminded about your investment techniques."

He summed up: "You need to be sure of your risk appetite and you need to be sure of your costs."

Meanwhile, Anne Maher, the chief executive of the Pensions Board, the Irish regulator, has called for common funding assumptions within Europe under the occupational pension fund directive.
 
"We do see the need for common funding assumptions across Europe," Maher told the event. She pointed out how each European Union member state has very different funding requirements, and that some continental European states found the concept of "underfunded" difficult due to the lack of funded schemes.

The Institutions for Occupational Retirement Provision's article that schemes needed to be fully funded at all times was a "virtually impossible requirement" that hadn't been thought through, Maher told delegates. It that were the case there wouldn't be any cross-border funds at all, she argued.
 
Under current Irish legislation, schemes are allowed a 10-year recovery period from underfunding, which is under review for cross-border funds. "It's a question we're going to have to answer in the near future," Maher said - otherwise it would lead to a mixed bag.

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