Investment - Articles - JLT EB and BMO launch innovative LDI solution

 • New solution combines real rate liability hedging with synthetic equity exposure

 This innovative new fund provides two times leveraged exposure to real rates with one times synthetic equity exposure using a shared collateral pool. This benefits UK Defined Benefit (DB) pension schemes by allowing them to hedge interest rate and inflation risk without foregoing equity returns, which are often needed to help close funding gaps.

 The new fund combines the best aspects of BMO’s Dynamic LDI Funds, which enable pension schemes to benefit from dynamic hedging instrument selection, with passive equity exposure via exchange traded equity futures.

 Jig Sheth, Head of Strategy at JLT Investment Consulting, commented: “This innovative new solution will enable DB pension schemes to significantly reduce their liability risk, whilst maintaining exposure to growth assets that are needed to reduce funding deficits – all in a simple, cost effective, and low governance pooled fund.

 “Furthermore, by hedging two pounds for every £1 invested, it also allows for greater diversification away from equities by freeing assets to invest elsewhere. Now the best aspects of liability hedging utilised by the largest and most sophisticated pension schemes are accessible to pension schemes of all sizes, without the need to reduce the total equity allocation.”

 Greg Skinner, Head of UK Institutional & Consultant Relations at BMO Global Asset Management, said: “The recent increase in pension scheme deficits has renewed the focus on liability risk management. However, with increased deficits many schemes cannot afford to reduce their growth allocation. By investing in this fund clients can achieve a meaningful increase in liability hedging without sacrificing their return expectation.

 “Combining Dynamic liability hedging with synthetic equity exposure is something we have been doing for many years. This innovative solution brings two tried and tested investment approaches together in a straightforward manner, which makes the strategy accessible to pension schemes of all sizes.”