Self-serving nonsense from the City on LDI DC pensions

Apparently what the City would like to serve up to us to sort out our woeful DC pensions is a wonder drug called LDI. I read “with interest” that

More than half of the pensions industry feels that the liability-driven investment techniques could be used for defined contribution (pension) schemes.

This is deduced from a survey of 300 selected managers , FDs and trustees carried out by Professional Pensions on behalf of Schroders.

The liability driven investment techniques in question are a means of swapping equity for debt at propitious moments to ease the lives of finance director’s who have to account for defined benefit pensions on a mark to market basis. LDI is very popular not least because it is difficult, uses derivatives and thus earns banks like Schroders good money and enables a lot of people to know just a little bit more than their bosses and stay in a job.

Note to editors; LDI is not going to make the lives of those of us retiring from DC any better. In fact it is going to make it a whole lot worse.

Note to editors; LDI costs money, that money comes from members funds, those funds buy the pensions, LDI needs to deliver more than it takes out,

Note to editors; LDI is the process of Driving Investment strategies based on pension Liabilities. Whether “DIL” or “LDI” the liability is the shortfall between what DC members need in retirement and what they get. Charging a lot of money for an LDI strategy makes that harder not easier.

Note to Editors; most DC pension plans now swap equities for gilts as a matter of course – this is what default investment options do – it is called “lifestyle”. Lifestyle is LDI without the derivatives not very intetesting to investment banks like Schroders- but much cheaper, less risky and more effective than using “swaps”.

Note to editors; DC  is currently suffering from high fund management charges, unneccessary commissions and poor at retirement investment decisions. These problems are eating away at people’s pensions. We need to sort these problems out now and not be distracted by means to keep investment bankers in Ferraris.

Note to Editors; we are currently suffering a crisis of confidence in pensions. The crisis is down to our customers losing confidence in pensions delivering. Is there anyone out there who seriously thinks we will win back the confidence of the general public because their pension plans are now using LDI strategies devised by investment bankers?

I do not know how the question was asked by Professional Pensions on behalf of Schroders, but I do not know anyone in pensions who seriously thinks that LDI could be “useful”. It could, and probably will be “used” but then so were CDO‘s as a means of spreading cheap credit to house purchasers.

Just because there is a great deal of money flowing into defined contribution pensions at the moment, just because that flow is likely to grow to a torrent with the introduction of auto-enrolment, does not entitle Schroders or any other City institution to get their greedy mitts on our savings.

The “industry” that  Professional Pensions claims is more than 50% behind using LDI in DC is no such thing. This is phoney reporting of a phoney survey and it is right that blogs like mine put a stop to this nonsense before it twists the heads of investment consultants into believing they can make a living from my pension pot!

 I get calls all the time from bankers asking my advice on how they can sell structured porducts , LDI and other banking products into DC pensions. Listen guys- go away – I have got less polite expressions.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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8 Responses to Self-serving nonsense from the City on LDI DC pensions

  1. Brian Fleetwood says:

    Well said. It really is dangerous nonsense.

    And as you point out there is a big clue in the name.

  2. Robin says:

    LDI would be a wonderful idea, if only it was what it is called. But what is really pertinent is why can’t all these clever advisers tell us the truth, which is that anything that involves buying and selling costs money. Ah yes, of course because these clever advisers are the ones we are paying the money to when we buy and sell. Call me a cynic, but my guess is that the more complicated and obscure the financial product is, the more the fees are and the more risky it is in practice. Which is why sensible trustees ignore their advisers and steer well clear of anything they don’t fully understand. Pensions are a long term investment, I made my first payment 47 years ago and I hope to be still claiming on it in 20-30 years time so about 3 times the length of the average financial expert’s career. And any chance we can stop talking about liabilities when what we are talking about is an accounting fiddle, sorry I mean IAS19/FRS17 valuation?

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