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Study: 12% of European funds use LDI derivatives

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EUROPE - A new study has found that 12% of continental European pension funds have implemented an asset/liability matching strategy using derivatives.

The report from Greenwich Associates and Northern Trust said that despite growing interest in liability driven investing, "there remains considerable confusion about what exactly LDI entails, how associated strategies should be implemented, and how to determine its true value proposition".

They found that some 12% of European plan sponsors have implemented an asset/liability matching strategy utilizing derivatives and that one in 10 have immunized liabilities.

They added that 11% of UK sponsors have an asset/liability duration matching strategy in place and that 7% have immunized liabilities.

On a global basis, "response to regulatory changes" was cited by 42% of sponsors as a cause for implementing LDI. Three in 10 respondents cited "response to mark-to-market accounting" as a cause.

Some 45% of UK sponsors said LDI was hindered by low interest rates.

"The term LDI means different things to different plan sponsors," said Greenwich consultant Lori Crosley.

"To some of the 140 plan sponsors we interviewed in Europe and North America, LDI is a synonym for asset-liability matching or even total immunization. To others it is a general strategy for extending duration in order to manage the risks of the portfolio.

"Despite these differences, the results of the research suggest that plan sponsors to a large degree are all seeking the same thing from liability-driven investing strategies: a greater sense of certainty."

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