Redington has urged pension funds to re-evaluate their LDI mandates now to avoid unrewarded risk that could result in undetected performance failures.
The London pensions consultancy has called for pension fund proactivity in managing their managers, noting that many trustees may be unaware that those who hold the reins in implementing investment strategies may not be managing to appropriate standards for today’s challenging markets, as a result of older investment management agreements (IMAs). The upshot for pension funds is undue and unrewarded risks, as well as a sub-optimal level of transparency to inform effective board decision-making and governance.
Pete Drewienkiewicz, Head of Manager Research at Redington, said, “As pension funds spend valuable time and resource pinning down the right investment strategies with their consultants, it is absolutely vital that they ask their LDI managers – those who actually implement a key part of the strategy – the right questions. A good relationship with them can mean better governance for the pension fund as a whole.” He also noted, "Loose controls often originate from out-dated IMAs which were agreed when risk limits were less stringently negotiated. LDI markets evolve, it’s not just a case of signing an IMA and saying “job done”."
In September, Drewienkiewicz delivered one in a series of Redington’s free educational events for pension funds entitled What to ask of your LDI manager, which was attended by representatives of fifteen high profile schemes. The session covered processes for evaluating of LDI managers, as well as the topic of how to build an effective relationship with them.
During the session, Drewienkiewicz said: "The 'Gold Standard' of LDI risk limits should include regular reporting from the manager, with updates on performance within the clearly defined risk limits. This reduces the probability of large unidentified or unintended risks, and much greater confidence can be placed in the LDI manager. For trustees, building a great relationship with their LDI manager can enhance rather than restrict effective decision-making and governance."
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