Management accountants warn on LDI risk
UK - The Chartered Institute of Management Accountants has warned that adopting a Liability Driven Investing strategy could mean missing out on excess return.
"It should be noted that timing is a key point - there is a risk in adopting an LDI strategy that the ‘lock-in' might preclude any improvement that could have been generated by return seeking assets," CIMA said in a new report.
The comments are the latest in a series of warnings of some of the potential pitfalls of LDI. Last week law firm Reynolds Porter Chamberlain said moving into a "safety-first" LDI strategy could leave trustees and actuaries open to negligence claims.
And David Bennett-Rees, trustee director at the Superannuation Arrangements of the University of London pension fund, earlier queried the costs involved in LDI - saying it is probably more worthwhile for providers than clients.
CIMA's comments came in a new 54-page guidance publication - ‘The pension liability: managing the corporate risk' - aimed at corporate finance directors.
It provides guidance on conflicts of interest, saying: "CIMA's view is that no director of a company should be a trustee of the sponsored scheme as the risk of potential conflicts of interest is just too high."
CIMA is also working on a project alongside PricewaterhouseCoopers, communications consultancy Radley Yeldar and Tomkins that is seeking to develop best practice in corporate accounting in areas such as pensions.
It held a meeting last week attended by figures such as International Accounting Standards Board chairman Sir David Tweedie dubbed ‘tomorrow's reporting today'.
It has created a mock-up set of annual accounts for a fictional company called "Generico" including suggested ways to present pensions information.
These include such innovations as providing alternative views of the deficit in the front of the report, graphically presenting the deficit's volatility and explaining mortality tables.
"Investors want to appraise the chances of increased cash contributions or other action being needed in the future," an explanatory note states.