LDI solution to help pension schemes reduce deficits

F&C has begun marketing a pooled Liability Driven Investment (LDI) solution which enables pension schemes to hedge against the risks of future interest rate and inflation movements while helping to optimise their exposure to return generating assets and thereby reduce their deficits.

The F&C LDI Fund was launched at the end of 2006 initially with existing client assets and is now being actively marketed in the UK, Ireland and Continental Europe. The fund builds upon the company's successful experience in the Netherlands, where it launched a series of LDI pooled solutions specifically tailored to the Dutch market place in January 2006. The F&C Dutch pools have attracted over €1.1 billion of cash from a number of pension schemes.

A key feature of the F&C LDI Fund is that it provides a pure liability hedge, using derivative contracts within a passive pooled fund, thereby offering pension schemes a highly flexible solution which un-bundles the 'beta' provision of the hedge from the generation of 'alpha' through active portfolio management.

F&C has made significant investment over the last two years in its LDI capabilities to service its Europe-wide base of insurance clients and defined benefit pensions schemes. The company now has an 11-strong dedicated Asset Liability Management (ALM) team which runs the LDI product range and brings together experts in pensions, derivatives, quantitative methodologies and fund management who have previously worked at leading investment banks, actuarial consultants and fund management institutions. The ALM team is already responsible for around £19 billion of OTC derivative assets under management.

Fernando Ribeiro, Head of Investments at F&C, commented: "The problem of pension scheme deficits in Europe is rarely out of the headlines for long. LDI therefore has a vital role to play in the future of the pensions industry. Yet the delivery of flexible and robust LDI solutions to meet the needs of schemes requires highly specialist expertise. At F&C we have already committed considerable resources to LDI and are ideally placed in this fast growing area. The F&C LDI Funds have been well received by the consultant community and we are confident that they will continue to generate strong interest from Trustees."

Richard Watts , Head of Asset Liability Management at F&C, added: "The F&C LDI Funds enable both large and small pension schemes to hedge the interest rate and inflation risks within a pension scheme. The twin aspects of a pure beta hedge and effective use of gearing means that schemes can free up a higher portion of their assets to invest in return-generating portfolios using managers of their choice and thereby seek a rapid reduction in funding deficits."