Author: Chrissie Frank

 

RiskFirst and STOXX address the challenges of a £1 trillion market by providing independent benchmarks for liability-driven investing

iSTOXX Risk First LDI Indices can help pension trustees to address the challenges posed by liability-driven investing by improving manager monitoring and portfolio construction.

Benefits

  • The LDI indices serve as an independent point of reference for the UK’s defined benefit pension industry.
  • The indices function as flexible, investable building blocks for LDI portfolios.
  • A sophisticated methodology allows pension schemes to better match assets and liabilities over time.
  • The indices support pension scheme trustees and advisors in their efforts to select, monitor and challenge LDI managers.

Features

  • STOXX, in collaboration with RiskFirst, calculates a range of LDI indices that match a wide selection of UK pension scheme liability profiles.
  • The indices track the performance of corporate and government bonds denominated in GBP.
  • Four different sets of indices are provided: nominal bond indices, inflation-linked bond indices, blended indices and non-gilt indices.
  • The indices are constructed using a proprietary cash-flow matching model that incorporates best-in-class LDI techniques.
  • Certain key features of LDI portfolio construction, such as rebalancing between real and nominal exposure, are embedded in the index to offer a truly differentiated LDI solution.
  • The indices combine STOXX’s real-time fixed income index calculation capabilities with a unique set of data provided by RiskFirst.

The unspoken challenges

Current LDI practices pose a significant risk for pension trustees. While existing approaches do manage interest rate and inflation risks that UK pension schemes face, the absence of an independent and robust LDI benchmark creates a governance risk for trustees. Simple questions pose a challenge for trustees engaged in LDI:

  • How can trustees independently assess the performance of their LDI manager?
  • How can trustees compare the performance of one manager versus another?
  • How much risk is the LDI manager taking?
  • Who is responsible for creating the LDI benchmark?

 

Further information

For further information, including downloads, please click here.

You can download the press release here.