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Legal warning over “too safe” LDI

UK - Moving into a safety-first liability-driven investing strategy could leave trustees and actuaries open to negligence claims, a law firm says.

"Playing it too safe with pension fund investments could make trustees and actuaries open targets for negligence claims," said Reynolds Porter Chamberlain.

The firm, which specialises in professional negligence, says an investment strategy that is more conservative than the norm but still leaves a fund in deficit could also attract claims from disgruntled fund holders.

It said: The poor performance of equities in 2001/2002 led to an increase in the use of liability driven investment (LDIs) strategies whereby entire portfolios were shifted into ‘safe' gilts or a mixture of gilts and corporate bonds."

Reynolds' partner Simon Goldring said the strategy could be storing up problems for the future: "A low yielding gilts strategy could lock in a fund's deficit, whereas a more balanced gilt/equity investment has a better long term chance of capital growth.

"Not only that, but an extremely cautious strategy does not even mean a deficit will necessarily be capped if there are unexpected changes in mortality rates and salary inflation."

"The other problem is that many schemes have switched to gilts, pushing up prices. Yields have fallen, weakening the attraction of these investments. Meanwhile equities have increased in value since March 2003."

"If equity markets continue to perform well and gilts do not improve the environment becomes more fertile for negligence claims caused by an under-exposure to equity investments."

The boom in LDI followed Boots' landmark decision to shift its entire portfolio into bonds in 2001, Reynolds claims - but says it is concerned that not many fund have followed Boots' example in reviewing that strategy as equities rose in value.

The law firm say that pension funds that have not adapted may be exposed to claims.

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